Reunion of Causticity with the law of Diminishing Utility

The concept of availability of demand  connected with the law of diminishing utility.and it is negative when with an increase in income, the consumer purchases less, e.g., in the case of inferior goods. It may be carefully noted that for any individual seller or firm, the demand for the product is highly elastic even though the demand for the product as a whole may be inelastic. By lowering the price, as compared with his rivals, the seller can infinitely increase the demand for his product. The demand curve will thus be a horizontal line. Both elasticizes, viz., price elasticity and income elasticity, are valuable aids in measurement of demand for different commodities. As such they are also helpful in measuring the incidence of taxation.

Cross Elasticity

Here, a change in the price of one good causes a change in the demand for another. Cross-elasticity of Demand for X and Y.

This type of elasticity arises in the case of interrelated goods such as substitutes and complementary goods. Tile two commodities will be complementary, if a fall in the price of Y increases the demand for X and conversely, if a rise in the price of one commodity decreases the demand for the other. They will be substitute or rival goods if a reduction in the price of Y  decreases the demand for X, and also if a rise in price of one continuity (say tea) increases the demand for the other commodity (say coffee). The cross elasticity of complementary goods is positive and that between substitutes, it is negative. It should, however, be remembered that ‘cross elasticity’ will indicate complementary or rivalry only if the commodity in question figure in the family budget in small proportions.

Cross elasticizes of demand can be used to indicate boundaries between industries. Goods with high cross elasticizes constitute one industry. whereas goods with low cross elasticity constitute different industries. It is not to be supposed that cross-elasticity represents reciprocal relationship. It is not a two-way street. Tile cross-elasticity represents reciprocal relationship. It is not a two-way street. The cross-elasticity of with respect to coffee is not the same as that of coffee with respect to tea. The tastes of the consumer, his money income and  prices except of the commodity Y arc assumed to remain constant.

To put in mathematical term.

Although. we may distinguish between price elasticity, income elasticity, cross elasticity and substitution elasticity, but we generally confine here to the discussion of price elasticity.

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