Income elasticity of demand= % change in the demand
% change in the income
The income elasticity of demand varies from 0 to 1. In case of restaurants industry, if the income of the consumer increases by 10%, the demand for restaurants would lead to increase by 4%.
Income elasticity can also be negative but that is in case of inferior goods, hence in the given case the income elasticity of demand is positive.
Cross elasticity of demand= % change in the demand
% change in the price of another good
- Water Supply industry products and new pool construction
In the above case, if the price of water supply would increase by 10%, that would lead to reduction in the demand of swimming pool by 5%. The cross elasticity would be -0.2. Hence the reduction in demand would lead the elasticity into negative that is far away from zero.
- Supermarkets and Grocery Stores industry products and restaurant meals
This can be explained by quoting an example, here it has been assumed that the all the materials that are used in restaurants have arrived from grocery store. If the price of grocery store or supermarket would lead to decrease by 20%, it would lead to increase the demand of restaurant meals by 10%. Hence the cross elasticity can be calculated as +10%/ -20%, that would be -0.5. Here the cross elasticity is negative that is far away from zero.
- Cafes and Coffee shops industry products and restaurant meals
In the above case, these two industries are substitute to each other that is why increase in the price of one industry would lead to increase in the demand of other industry. Hence here the cross elasticity would arrive positive.
- Grain Growing industry products and butter sold for human consumption
It has been assumed that butter is used for finished product of grain. Hence these are considered as complimentary in nature. Therefore, increase in the price of grain growing industry would lead to decrease in the demand of butter for human consumption.
If the equilibrium price is far below than price to be paid by the consumer, it would be consumer surplus, while in case of price is higher than the equilibrium price, it would lead to producer surplus. In restaurants industry there is majorly producer surplus due to involvement of goodwill and brand.
In case of water supply industry, the government should incorporate price ceiling so that the restaurants would not be able to charge price above the set price. This would lead to a balance in the demand and supply of the water.
The intersection of P and Q is called as equilibrium price, if the water supply industry would charge P1; it would lead to surplus to water industry but reduce the demand to Q1. While if the industry would reduce the price to P2; the industry would run into losses, and lead to increase in the demand to Q2.
Economic surplus is the addition of consumer surplus and producer surplus. The increase in producer surplus would lead to decline in consumer surplus and vice versa. Hence the economic surplus would not be changed due to change in consumer and producer surplus.