(b) Examine the importance of income elasticity of demand for the producers of primary products, manufactured goods and services.
These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice. Unethical use is strictly forbidden.Using the above formula, if the XED is found to positive, i.e., greater than 0 (XED>0), then the two goods A and B are considered to be substitute goods and their demand is competitive (Ziogas, 2012). In this case, an increase in the price of good A will lead to an increase in demand for good B. Examples of such goods are different brands of cereal, tea and coffee, Pepsi and Coca-Cola, and Butter and Margarine.
If the XED is negative, i.e. less than 0 (XED<0), then the two goods A and B are complements which means that they have joint demand (Ziogas, 2012). For complementary goods, an increase in the price of good A leads to a decrease in demand of good A, and the same will apply for good B. For example, if car prices increase, there will be reduced demand for cars, and consequently, less demand for fuel. Other examples include shoes and polish, torches and batteries, computers and software, and gaming consoles such as the Xbox and the Xbox games themselves.
In situations where XED equates to 0 (XED=0), the two goods are considered unrelated. For example, milk and cars, tea and televisions, and coffee and computers. In...
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