The price elasticity of demand is a measure of how much more (or less) a consumer buys when the price of a product changes. This measurement is critical for managers to understand before deciding to change prices. But consumers don’t just respond to price changes of one product. They also react when the price changes for related products or when their disposable income changes. In the following discussion, consider your own behavior as a consumer when these things happen.
1. Name two goods where your cross-price elasticity of demand is greater than one (that is, your demand is elastic for Good A when the price of Good B changes). What would you do if you were the manager of the company that sells Good A?
2. Name one good where your income elasticity of demand is greater than one (that is, when your income changes, your demand is elastic). What would you do if you were the manager of the company that sells this good?