There are three types of elasticity of demand: price, cross-price, and income. In a price-based model, the formula used is the percentage change in the quantity demanded divided by the percentage change in price. For example, if the price of agricultural products, such as rice, increases, then the demand will inevitably decrease.
Interestingly, this is linked to the income-based model, which states that the purchasing ability of an individual or household is dependent on their expendable income. So someone with a low-income salary will be more affected by the increasing prices of agricultural products.
Therefore, the demand for that agricultural product will decrease, and the consumer will find cheaper alternatives or eliminate that product from their budget altogether.
The cross-price model is related to the price-based model, which simply factors in joint-demand of complimentary products. For example, one has to buy headphones or earbuds if they purchase an audio recorder. If the price of the audio recorder decreases, the demand for both the audio recorder and headphones will increase.
This is one of the reasons why manufacturing has dominated the GDP share over the past few decades. Many countries that initially had a large agrarian economy are now shifting towards the manufacturing and service sectors.
https://www.tutor2u.net/economics/reference/price-elasticity-of-demand
Wednesday, December 7, 2016
Which elasticity of demand concept is useful in explaining the fall in agriculture's share in GDP and the increase in the shares of manufactured products and services as a country grows and develops.
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