Economics
Cross Elasticity of Demand
Cross Elasticity of Demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good. It helps to determine whether two goods are substitutes or complements. A positive cross elasticity indicates that the goods are substitutes, while a negative cross elasticity suggests that the goods are complements.
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9 Key excerpts on "Cross Elasticity of Demand"
eBook - PDFMicroeconomics
Principles and Policy
- William Baumol, Alan Blinder(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
When two goods are such that when consumers get more of one of them, they want less of the other (steaks and hamburgers, Coke and Pepsi), economists call those goods substitutes . 4. Cross Elasticity of Demand is defined as the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. Two substitute products normally have a positive Cross Elasticity of Demand. Two complementary products normally have a negative Cross Elasticity of Demand. 5. A rise in the price of one of two substitute products can be expected to shift the demand curve of the other product to the right. A rise in the price of one of two comple-mentary goods tends to shift the other good’s demand curve to the left. 6. All points on a demand curve refer to the same time period —the time during which the price that is being decided upon or otherwise considered will be in effect. Key Terms complements 116 Cross Elasticity of Demand 116 (price) elasticity of demand 108 elastic, inelastic, and unit-elastic demand curves 112 income elasticity of demand 116 optimal decision 118 substitutes 116 Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 6 Demand and Elasticity 121 Test Yourself 1. What variables other than price and advertising are likely to affect the quantity demanded of a product? 2. Describe the probable shifts in the demand curves for a. Airplane trips when airlines’ on-time performance improves b. Automobiles when airplane fares double c. Automobiles when gasoline prices double d.
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
A change in any one of these “determinants of demand” will cause the demand curve to shift, and a measure of elasticity exists for each. 20-2a The Cross-Price Elasticity of Demand The cross-price elasticity of demand measures the degree to which goods are substitutes or complements (for a discussion of substitutes and complements, see the chapter “Scarcity and Opportunity Costs”). The cross-price elasticity of demand is defined as the percentage change in the quantity demanded of one good divided by the percentage change in the price of a related good, everything else held constant. When the cross-price elasticity of demand is positive, the goods are substitutes; when the cross-price elasticity of demand is negative, the goods are complements. If a 1 percent increase in the price of a movie ticket leads to a 5 percent increase in the quan-tity of movies that are downloaded off the Internet, movies at the theater and down-loaded movies are substitutes. If a 1 percent rise in the price of a movie ticket leads to a 5 percent drop in the quantity of popcorn consumed, movies and popcorn are comple-ments. Complements are items used together while substitutes are items used in place of each other. 20-2b The Income Elasticity of Demand The income elasticity of demand measures the magnitude of consumer responsiveness to income changes. The income elasticity of demand is defined as the percentage change in the quantity demanded for a product divided by the percentage change in income, everything else held constant (Figure 3). Goods whose income elasticity of demand is greater than zero are normal goods . Products that are often called necessities have lower income elasticities than products known as luxuries. Gas, electricity, health-oriented drugs, and physicians’ services might be consid-ered necessities. Their income elasticities are about 0.4 or 0.5. On the other hand, people tend to view dental services, automobiles, and private education as luxury goods.
eBook - PDF- David Besanko, Ronald Braeutigam(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
A P P L I C A T I O N 2.5 18 Houde, Jean-François, “Spatial Differentiation and Vertical Mergers in Retail Markets for Gasoline.” American Economic Review, 102, no. 5 (August 2012): 2147-2182. 19 See Shoichi Ito, E. Wesley, F. Peterson, and Warren R. Grant. “Rice in Asia: Is It Becoming an Inferior Good?,” American Journal of Agricultural Economics 71 (1989): 32–42. CHAPTER 2 DEMAND AND SUPPLY ANALYSIS 54 CROSS-PRICE ELASTICITY OF DEMAND The cross-price elasticity of demand for good i with respect to the price of good j is the ratio of the percentage change of the quantity of good i demanded to the percent- age change of the price of good j: , 100% 100% i i i j j j Q Q Q P P P or, after rearranging terms, , i j j i Q P j i P Q P Q (2.6) where P j denotes the initial price of good j and Q i denotes the initial quantity of good i demanded. Table 2.6 shows cross-price elasticities of demand for selected fruit products. Cross-price elasticity can be positive or negative. If 0 i j Q P , a higher price for good j increases the quantity of good i demanded. In this case, goods i and j are demand substitutes. Table 2.6 indicates that apples and peaches are demand substi- tutes: As the price of peaches increases, the quantity of apples demanded increases (cross-price elasticity of the demand for apples with respect to the price of peaches = 0.118). Likewise, as the price of apples increases, the quantity of peaches demanded increases (cross-price elasticity of the demand for peaches with respect to the price of apples = 0.015). If , 0 i j Q P , a higher price for good j decreases the quantity of good i demanded. In this case, goods i and j are demand complements. Table 2.6 indicates that apples cross-price elasticity of demand The ratio of the percentage change of the quantity of one good demanded with respect to the percentage change in the price of another good.
eBook - PDFMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2020(Publication Date)
- Routledge(Publisher)
This is to distinguish the responsiveness of the quantity demanded of a good to its own price rather than to the price of another good (cross price elasticity). It may be defined as: proportionate change in Q x η P = proportionate change in P x Using this formula the price elasticity of demand for good x can be written as: d Q x / Q x η P = d P x / P x Re-writing: d Q x P x η P = · d P x Q x 60 THE PRICE ELASTICITY OF DEMAND 3.2 Price elasticity of demand may be identified as elastic, inelastic or unitary elastic depending on the value of η P as follows: • If η P > 1 in absolute terms, demand is said to be price elastic. • If η P < 1 in absolute terms, demand is said to be price inelastic. • If η P = 1 in absolute terms, demand is said to be unitary elastic. It should be noted that price elasticity of demand for normal goods carries a negative value. That is because of the negative relationship between price and quantity (i.e. as price goes up, quantity goes down). However, typically, the value for price elasticity ( η P ) is written without the negative sign as the negative sign is understood. Where computation is involved the negative sign must be used. Consequences of the value of price elasticity Where the demand for a commodity is price elastic ( η P > 1 in absolute terms), the percentage change in the quantity demanded is greater than the percentage change in price and in the opposite direction. The significance is that if price is reduced by a certain proportion (say 10 per cent), the quantity demanded is increased by a greater proportion (say 15 per cent). Thus a price reduction leads to increased consumer expenditure on the good and consequently increased revenue for the seller of the good. A price increase, on the other hand, leads to a reduction in revenue for the seller of the good.
eBook - PDF- Irvin Tucker(Author)
- 2018(Publication Date)
- Cengage Learning EMEA(Publisher)
ChAPTEr 5 • Price Elasticity of Demand 103 5–1 PRICE ELASTICITY OF DEMAND In Chapter 3, when you studied the demand curve, the focus was on the law of demand. This law states there is an inverse relationship between the price and the quantity demanded of a good or service. In this chapter, the emphasis is on measuring the relative size of changes in the price and the quantity demanded. Now we ask: By what percentage does the quantity demanded rise when the price falls by, say, 10 percent? 5–1a The Price Elasticity of Demand Midpoints Formula 1 Economists use a price elasticity of demand formula to measure the degree of consumer responsiveness, or sensitivity, to a change in price. Price elasticity of demand is the ratio of the percentage change in the quantity demanded of a product to a percentage change in its price. Price elasticity of demand explains how strongly consumers react to a change in price. Think of quantity demanded as a rubber band. Price elasticity of demand measures how “stretchy” the rubber band is when the price changes. Suppose a university’s enroll-ment drops by 20 percent because tuition rises by 10 percent. Therefore, the price elas-ticity of demand is 2 (−20 percent/+10 percent). The number 2 means that the quantity demanded (enrollment) changes 2 percent for each 1 percent change in price (tuition). Note there should be a minus sign in front of the 2 because, under the law of demand, price and quantity move in opposite directions. However, economists drop the minus sign because we know from the law of demand that quantity demanded and price are inversely related. The number 2 is an elasticity coefficient , which economists use to measure the degree of elasticity. The elasticity formula is E d uni003D.bold percentage change in quantity demanded percentage change in price where E d is the elasticity of demand coefficient. Here you must take care. There is a prob-lem using this formula .
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Chapter 5 Elasticity of Demand and Supply 99 5-2 Determinants of the Price Elasticity of Demand So far we have explored the technical properties of demand elasticity and discussed why it varies along a downward-sloping demand curve. But we have yet to consider why elasticity is different for different goods. Several factors influence the price elastic-ity of demand. 5-2a Availability of Substitutes As we saw in Chapter 4, your particular wants can be satisfied in a variety of ways. A rise in the price of pizza makes other food relatively cheaper. If close substitutes are available, an increase in the price of pizza prompts some consumers to buy substitutes. But if nothing else satisfies quite like pizza, the quantity of pizza de-manded does not decline as much. The greater the availability of substitutes and the more similar these substitutes are to the good in question, the greater that good’s price elasticity of demand. The number and similarity of substitutes depend on how the good is defined. The more narrow the definition, the more substitutes and, thus, the more elastic the demand. For exam-ple, the demand for Post Raisin Bran is more elastic than the demand for raisin bran in general because there are more sub-stitutes for Post Raisin Bran, including Kellogg’s Raisin Bran and Total Raisin Bran, than for raisin bran generally. The demand for raisin bran, however, is more elastic than the demand for breakfast cereals more generally because the consumer has many substitutes for raisin bran, such as cereals made from corn, rice, wheat, or oats, and processed with or without honey, nuts, fruit, or chocolate. To give you some idea of the range of elasticities, the price elasticity of demand for Post Raisin Bran has been estimated to be 2 2.5 versus 2 0.9 for all breakfast cereals. 2 Apple iTunes music downloads fell by 14 percent in 2014, because the company faced stiff competition from free online music videos and from music streaming ser-vices, such as Spotify.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis. Definition PED is a measure of responsiveness of the quantity of a good or service demanded to changes in its price. The formula for the coefficient of price elasticity of demand for a good is: The above formula usually yields a negative value, due to the inverse nature of the relationship between price and quantity demanded, as described by the law of demand. For example, if the price increases by 5% and quantity demanded decreases by 5%, then the elasticity at the initial price and quantity = −5%/5% = −1. The only classes of goods which have a PED of greater than 0 are Veblen and Giffen goods. Because the PED is negative for the vast majority of goods and services, however, economists often refer to price elasticity of demand as a positive value (i.e., in absolute value terms). This measure of elasticity is sometimes referred to as the own-price elasticity of demand for a good, i.e., the elasticity of demand with respect to the good's own price, in order to distinguish it from the elasticity of demand for that good with respect to the change in the price of some other good, i.e., a complementary or substitute good. The latter type of elasticity measure is called a cross -price elasticity of demand. As the difference between the two prices or quantities increases, the accuracy of the PED given by the formula above decreases for a combination of two reasons. First, the PED for a good is not necessarily constant; as explained below, PED can vary at different points along the demand curve, due to its percentage nature. Elasticity is not the same thing as the slope of the demand curve, which is dependent on the units used for both price and quantity.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 94 Part 2 Introduction to the Market System be represented as Δp and the change in quantity as Δq. The formula for calculating the price elasticity of demand E D between the two points is the percentage change in quan- tity demanded divided by the percentage change in price, or E D 5 Δq 4 Δp (q1q9)/2 (p1p9)/2 Again, the same elasticity results whether going from the higher price to the lower price or the other way around. This is sometimes called the midpoint formula, because the bases for computing percentages are midway between the two points on the curve. Elasticity expresses a relationship between two amounts: the percentage change in quantity demanded and the percentage change in price. Because the focus is on the per- centage change, we don’t need to be concerned with how output or price is measured. For example, suppose the good in question is apples. It makes no difference in the elasticity formula whether we measure apples in pounds, bushels, or even tons. All that matters is the percentage change in quantity demanded. Nor does it matter whether we measure price in U.S. dollars, Mexican pesos, Zambian kwacha, or Vietnamese dong. All that matters is the percentage change in price. Finally, the law of demand states that price and quantity demanded are inversely related, so the change in price and the change in quantity demanded move in opposite directions. In the elasticity formula, the numerator and the denominator have opposite signs, leaving the price elasticity of demand with a negative sign.
- Berkeley Hill(Author)
- 2013(Publication Date)
- Pergamon(Publisher)
An example is butter and margarine. When the price of butter rises, consumers will buy more margarine. Fig. 3.9 shows that a rise in the price of a competi- Demand and Supply 59 FIG. 3.9 Effect on the Demand Curve of a Price Rise of a Competitive Good I σ E o α> o Quantity of margarine demanded per week tive good shifts the demand curve of margarine (i.e. the curve showing quantities of margarine demanded at different prices of margarine) to the right. The sensitivity of demand for margarine to the price of competitive goods, called the Cross Elasticity of Demand, is given by the formula: PERCENTAGE CHANGE IN QUANTITY CROSS ELASTICITY OF = OF GOOD A DEMANDED DEMAND FOR GOOD A ( E D x ) PERCENTAGE CHANGE IN PRICE OF GOODB The actual figure for butter and margarine is about 4- 0.23 The ^Όχ of competitive goods is positive, since a rise in price of one will cause more of the other to be bought. (ii) Complementary goods: Complementary goods are those which are usually used together. An example is oil and petrol for cars. If more petrol is bought in any one year, more oil is also bought because cars use both together. Such goods are sometimes called Joint Demand goods. If the price of petrol rises but that of oil is unaltered, not only will less petrol be bought but less oil too. Cross elasticities of joint demand goods are negative. The effect on the demand curve for oil of a rise in the price of petrol is to shift it to the left, as in Fig. 3.10. There is a link between the Cross Elasticity of Demand between two competitive goods and the price elasticities of demand of each good. Goods which are sensitive to prices of competitors will also tend to have Movement to right caused by a rise in the price of butter 60 An Introduction to Economics for Students of Agriculture FIG. 3.10 Effect on the Demand Curve of a Price Rise of a Complementary Good Ö *o <υ o Quantity of oil demanded per week shallow demand curves i.e.
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