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2.Gold prices are volatile because the supply of gold is highly inelastic, and unstable demand resulting from speculation causes prices to fluctuate significantly.

III.Cross elasticity and income elasticity of demand:

A.Cross elasticity of demand measures the effect of a change in a product’s price on the quantity demanded for another product.  Numerically, the formula is shown for products X and Y.

Exy      =     (Percentage change in Quantity of X)

                                (Percentage change in Price of Y)

1.If cross elasticity is positive, then X and Y are substitutes.

2.If cross elasticity is negative, then X and Y are complements.

3.Note:  if cross elasticity is zero, then X and Y are unrelated, independent products.

B.Income elasticity of demand refers to the percentage change in quantity demanded that results from some percentage change in consumer incomes

Ei = (percentage change in quantity demanded)  

    (Percentage change in income)

1.    Positive income elasticity indicates a normal or superior good.

2.Negative income elasticity indicates an inferior good.

3.Those industries that are income elastic will expand at a higher rate as the economy grows

IV.Consumer and Producer Surplus

A.Consumer Surplus

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