Cross elasticity is a measure of the responsiveness of the demand or quantity of a good or service to changes in the price of related goods and services. For example, if an increase in the price of bread results in an increase in the demand for butter, the two goods have a positive (direct) cross-elasticity.
Conversely, if an increase in the price of bread leads to a decrease in the demand for butter, the goods have a negative (inverse) cross-elasticity. A good example of this is the relation between beef and chicken.
A rise in the price of beef tends to increase the quantity demanded for chicken, as people switch to a more affordable protein source. Conversely, an increase in the price of chicken would decrease the demand for beef, as people switch to a cheaper protein source.
Another example of cross-elasticity is between the prices of gasoline and hybrid cars. As the cost of gasoline increases, the demand for hybrid cars also increases, since they are more fuel-efficient.
On the other hand, a decrease in the price of gasoline decreases the demand for hybrids, as people opt for cheaper, gas-powered vehicles.
Table of Contents
How do you explain cross elasticity?
Cross elasticity is a measure of the sensitivity of the demand for a good or service to a change in the price of another good or service. It measures the impact of a change in the price of one good or service on the demand for another good or service.
For example, if a good is an input in the production of another good (called a complementary good), then an increase in the price of the input good will result in a decrease in the demand for the complementary good, and the cross elasticity of the two goods will be negative.
On the other hand, if the two goods are competing goods, an increase in the price of one good will lead to an increase in the demand for the other, and the cross elasticity would therefore be positive.
Thus, a measure of the cross elasticity of two goods can be used to indicate the extent of their competition or complementariness. Cross elasticity is also a useful tool for quantifying the extent of complementary and substitute goods, and for understanding the effects of changes in price or quantity of one good on the other.
It can be used to understand the relationship between the two products and can help businesses adjust their pricing and marketing strategies to maximize sales of the goods in question.
What is a good example for elasticity?
Elasticity is the measure of the responsiveness of a quantity to changes in other related quantities. A good example of elasticity is the demand for luxury goods. Luxury goods generally have a higher elasticity of demand since their pricing and availability often affects the quantity sold.
For example, let’s consider a designer clothing store that sells fashionable clothing at a high price. If this store raises the price of their clothing, due to the elasticity of demand for luxury goods, the quantity of items sold from that store will likely decrease as consumers look for cheaper options.
Alternatively, if they lower prices, the demand for their clothing is likely to go up as more people will be able to purchase their items. This is a perfect example of how the demand for a luxury item is affected by the elasticity of the item.
Which of following is an example of cross elasticity of demand *?
Cross elasticity of demand is a measure of how much the demand for one good changes when the price of another good changes. An example of this type of elasticity is the relationship between the prices of chicken and beef.
If the price of chicken increases, the demand for beef may go up because some people may switch from chicken to beef. Likewise, if the price of beef increases, the demand for chicken may go up because some people may switch from beef to chicken.
What are the 3 types of cross-price elasticity of demand?
Cross-price elasticity of demand is an economics term used to describe the responsiveness of consumers to changes in the prices of two related goods or services. Generally speaking, when two goods or services are related, as one increases and decreases in price, the demand of the other may either increase or decrease as well.
The three types of cross-price elasticity of demand are as follows:
1. Complementary Goods: These are two goods or services that are truly related in that an increase in the price of one can lead to a decrease in the demand of the other. An example of this would be if the price of gasoline increases, consumers may purchase fewer luxury cars due to the increased financial burden of owning a car.
2. Substitute Goods: These are two goods or services that could be looked at as substitutes for each other. Generally, when the price of one good or service increases, consumers turn to its substitute in order to save money.
An example of this would be if the price of a specific type of laptop increases, consumers may turn to a newer laptop model of the same brand in order to save money.
3. Jointly Demanded Goods: These are two goods or services that are related but not necessarily substitutes or complements. For example, when the price of pet food increases, the demand for the veterinarian services related to the same pet may increase as well since owners want to make sure their pets are healthy.
How do you find the cross price elasticity between two goods?
The cross price elasticity between two goods can be calculated by using the formula: EP = (∆Qx/∆Py) ÷ (Qx/Py), where EP is the cross price elasticity, ∆Qx is the change in the quantity of good x, ∆Py is the change in the price of good y, Qx is the quantity of good x, and Py is the price of good y.
The cross price elasticity measures the sensitivity of a good’s demand in response to a change in the price of another good.
To find the cross price elasticity between two goods, start by calculating the percentage change in the quantity of good x in response to the change in the price of good y. To do this, subtract the original quantity of good x from the new quantity after the price change and then divide the result by the original quantity.
Next, calculate the percentage change in the price of good y in the same way.
Once both percentage changes are known, divide the percentage change in the quantity of good x by the percentage change in the price of good y to get the cross price elasticity EP.
A positive number for EP indicates that the two goods are substitutes, meaning that when the price of one of them increases, demand for the other will increase. A negative number indicates that the two goods are complements, meaning that when the price of one of them increases, demand for the other will decrease.
If EP is equal to zero, then the two goods are independent which means that a change in one will have no effect on the demand for the other.
Is elasticity of 0.5 elastic or inelastic?
Elasticity of 0. 5 is considered to be inelastic. In economics, elasticity is a measure of how the demand for or supply of a good or service changes in respect to its price. If the elasticity is 0. 5 or less, the demand is inelastic.
This means that there is a relatively small or no change in the demand of the good or service in response to a change in its price. For example, if the price of a good doubles, the associated demand for the good does not significantly change.
What are the 3 factors that determine elasticity?
The three key factors that determine elasticity are the availability of substitutes, the proportion of income spent on a good or service, and the amount of time that passes before changes in prices take effect.
Availability of substitutes is a key factor in elasticity because when a product has no substitutes or alternatives, consumers are forced to pay the original price. If the product has several substitutes however, the choice of alternatives gives the consumer the power to decide which one provides the best deal, thereby affecting the demand for the original product.
The proportion of income spent on a good or service is also a factor in elasticity. When the price of a product increases but its cost is still proportionally small in comparison to the consumer’s income, they are more likely to continue purchasing it.
On the other hand, if the cost of the product takes up a large portion of a consumer’s income, they may be unwilling to pay the higher price and instead will switch to a less expensive substitute.
The amount of time that passes before changes in prices take effect is the third factor in elasticity. If prices change quickly, consumers may be less willing to pay the higher price as they haven’t had adequate time to adjust.
On the other hand, if prices change gradually over time, consumers may be more likely to accept the change and pay the higher price as they feel they have had time to adjust to the new costs.
