Demand and their elasticities

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Demand and elasticity are concepts used in economics to understand how changes in various factors affect the quantity demanded of a good or service.

Demand: Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a specific period. The law of demand states that all else being equal, as the price of a good or service decreases, the quantity demanded increases, and vice versa.

Elasticity of Demand: Elasticity of demand measures the responsiveness of quantity demanded to changes in price or other factors. It indicates how much the quantity demanded will change in response to a change in price.

Price Elasticity of Demand (PED): This measures the percentage change in quantity demanded in response to a one percent change in price. It's calculated as:

PED=Percentage Change in Quantity Demanded/Percentage Change in Price

If PED > 1, demand is elastic, meaning the quantity demanded is highly responsive to price changes.

If PED = 1, demand is unit elastic, meaning the percentage change in quantity demanded is equal to the percentage change in price.

If PED < 1, demand is inelastic, meaning quantity demanded is not very responsive to price changes.

Income Elasticity of Demand (YED): This measures the percentage change in quantity demanded in response to a one percent change in income. It's calculated as YED=Percentage Change in Quantity Demanded/Percentage Change in Income

If YED > 0, the good is normal (as income increases, demand increases).

If YED < 0, the good is inferior (as income increases, demand decreases).

Cross-Price Elasticity of Demand (XED): This measures the percentage change in quantity demanded of one good in response to a one percent change in the price of another good. It's calculated as: 

XED=Percentage Change in Quantity Demanded of Good A/Percentage Change in Price of Good​

If XED > 0, the goods are substitutes (an increase in the price of one good leads to an increase in the demand for the other).

If XED < 0, the goods are complements (an increase in the price of one good leads to a decrease in the demand for the other).

Understanding demand and elasticity is crucial for businesses and policymakers to make informed decisions regarding pricing, production, marketing, and public policy interventions.

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