A recession reducing a consumer’s income by 10% will have a more significant effect on the consumers will and ability to purchase music compact discs over cabinet maker’s work. Since income determines the amount of disposable income available to a consumer, the choice of cabinet marker’s work over music compact disc is eminent. Change in income impacts the quantity of music disc purchases more than cabinet maker’s work. The quantity purchased for music compact discs will be ten times more than that of cabinet marker’s work.
Pre-recorded compact music discs and MP3 music players serve the same market. There are many ways that can be used to tell if the two are in direct competition with one another. In the first scenario, the price can be used to tell if they are competing for products. This can be done by increasing the price of either pre-recorded compact music discs or MP3 music players. If there is a market rush to buy one of the products than there is for another, then the two products are competitors. On the other hand, if this does not occur, then they are not competing. It is assumed that an increase in the price of either product will make it unaffordable for many consumers, and hence they will turn to substitute products. Therefore, the price can help in determining whether the two are competing. Alternatively, quality can also be used in the determination of whether the two are competing. In this case, one of the products can have some added features which improve its quality compared to the other. The quality of MP3 music players can be maintained at its initial ratings. If consumers go for pre-recorded compact music discs and neglect MP3 music players, then it means that they prefer it to the latter due to the added feature. When two products are competing, it means that they are substitutes.
‘Income elasticity of demand’ is a term used in reference to shifting incomes of individuals with respect to the demand for a certain good. YED of +0.5 shows that the good is elastic. That is, any change in income levels will have a significant impact on the quantities purchased. This is normally the case with normal goods since the more the income, the more the quantity of the good purchased; normal goods have a positive income elasticity of demand. YED of -2.5 means that the good is inelastic. It implies that the demand for a good or service will not in any case decrease or increase with a given rise or fall in its price. This is normally the case for inferior goods since, increase in income does not translate to an increase in quantity demanded; inferior goods do not conform to the law of demand as they have negative elasticity of demand. On the other hand, an increase in price will increase revenues, but the quantity demanded might decrease.
Cross-price elasticity of demand is an index of demand responsiveness of a given product as a result of price changes of another product. In the case of substitute products, we have positive demand elasticity (for example, as provided in the above case in which XED = +0.64). Accordingly, the increased price of one product results in an increased demand for another. For example, in response to an increase in the price of bread, the demand for cakes will rise. Where we have perfect substitutes, positive infinity equals demand elasticity. A XED = -2.6 shows that the goods are complements. That is, one is used with the other.