Price Elasticity

1. When demand is price-inelastic a price decrease reduces total revenue.

2. When demand is price-elastic, a price decrease increases total revenue.
3. In the borderline case of unit-elastic demand, a price decrease leads to no change in total

Cross elasticity of demand (Ec)

The findings from Cross price elasticity of demand (Ec):

1. If Ec is positive, then it is substitute goods,

2. If Ec is negative, then it is complementary goods,
3. If Ec = 0, then there is no relationship between two goods

Goods are substitutes if an increase in the price of one increases the demand for the other.
Goods are complements if an increase in the price of one decreases the demand for the other.
Goods are independent if a price change for one has no effect on the demand for the other.

Income elasticity of demand (Ei)

Income elasticities are high for luxuries, whose consumption grows rapidly relative to income.
Negative income elasticities are found for “inferior goods,” whose demand falls as income rises.
Demand for many staple commodities, like clothing, grows proportionally with income.