 # Cross Price Elasticity

Improved Essays
Elasticity is used in economics to measure the degree of responsiveness in demand in relation to an alteration in price or income. Economists use the term price elasticity of demand to express how much a change in price influences demand. Comparable, cross price elasticity determines the change in demand of one product with the increase or decrease in price on a different product. Similarly, income elasticity of demand intends to measure the change in demand after a change in consumers’ income. Elasticity is said to be elastic when the change in demand is greater than the change in price. Inversely, a greater change in price than the change in demand is considered inelastic. The following scenarios will allow a further expansion of these concepts …show more content…
Immediately, this number helps us predict that the elasticity is inelastic since, once again, the absolute value of -0.5 is less than 1.0. However, unlike Scenario 1, cross-price elasticity tries to determine how a price change in product Y will impact the demand of product X. Cross-price elasticity is calculated with the same formula mentioned in the previous example, E = %Q / %P. Therefore, if we have a price increase of 10% in product Y, we can determine that the demand of product X will drop by 5%. This indicates that the two products being compared are complements, since they have a negative elasticity, in this case -0.5. The reasoning behind this is the fact that when the price of complement Y rises, it will create an inverse reaction to the demand of complement X. Thus, when formulating the cross-price elasticity, the outcome will always be a negative …show more content…
Income elasticity attempts to represent the response in demand in relation to a change in income. Such elasticity is obtained by formulating, E = %Q / %I. Assuming the increase of income is 10%, we can determine the change in quantity demanded by solving, 10% x -2.0, which equals -20%. This indicates that a raise in income by 10% will decrease the quantity demanded by 20%. In such case the product analyzed is an inferior good since by definition, buyers will purchase less of this good as their income increases. Similarly, the fact that the income elasticity of this case is negative, predicts that the product is an inferior good, because quantity demanded and income move in opposite directions for such products. In distinction to the three previous examples, the product in this case is considered elastic because the absolute value of its elasticity is greater than 1.0, 2.0 >

## Related Documents

• Improved Essays

Describe the outcomes to equilibrium price and quantity when supply and demand curves shift when 1) supply is normal (elasticity = 1) and demand is elastic, 2) supply is normal (elasticity = 1) and demand is inelastic, 3) demand is normal (elasticity = -1) and supply is elastic, 4) demand is normal (elasticity = -1) and supply is inelastic, 5) demand and supply are both elastic, 6) demand and supply are both inelastic. In the competitive model the interaction between supply and demand is is delineated as a relationship charting out the price on the Y axis versus the quantity on the x-axis. The supply curve in general is depicted by an upward sloping curve, were low dollar values are associated with low quantities produced. As the quantity…

• 1093 Words
• 5 Pages
Improved Essays
• Great Essays

Because the creditor tends to consume less and save more, in order to invest the money in debtors, as a result they have a large proportion of savings. When deflation impairs debtors’ wealth, the decline in consumption will makes debtors suffers more than the…

• 1183 Words
• 5 Pages
Great Essays
• Superior Essays

• Inferior: These are goods that are less preferred relative to goods of the same type. They have an inverse relationship with income. This is because the consumer derives minimal utility in purchasing it relative to others. Thus when income increases the consumer will buy less of it n favor of “better” goods. • Complementary: These are goods that are used in conjunction with other goods and thus are consumed together, for example vehicles and car insurance.…

• 1073 Words
• 5 Pages
Superior Essays
• Improved Essays

They want to know the amount of demanded changed when the price change. In other words, they want to know the elasticity which measures the responsiveness of demand. The two keys to understanding it is the sign and value of the answer. However, the PED tend to be a negative number because the quantity of demand fall when the price rise. So we usually more focus on the value.…

• 997 Words
• 4 Pages
Improved Essays
• Superior Essays

Elasticity Paper In this paper, we will examine the elements of price elasticity. Also, we will discuss substitute and complement goods and the differences between them. Price elasticity is a concept used in economics to describe how a change in price affects a demand or supply curve; specifically, the degree of change in reaction to a price change (Heakel, 2015). Elasticity is measured by dividing the percentage of change of quantity by the percentage of change in price (Colander, 2013). The Law of Demand says that when the price of a good increases, the quantity decreases.…

• 1045 Words
• 5 Pages
Superior Essays
• Improved Essays

Both of their results indicated negative relationship between firm leverage and the dependent variable. This means that the leverage is inversely with the profitability of firms. The reason given by Lazaridis and Tryfonidis on the result is firms would get a cheaper price if firms trade with suppliers by cash. The cash trade would decrease the leverage then increase the gross operating profit since firms purchase their inventories with lower…

• 1494 Words
• 6 Pages
Improved Essays
• Improved Essays

If demand is elastic, then increases in price would actually decrease total revenue because consumers will purchase less. Just to double check, let’s check the elasticity for brownies using the elasticity for demand formula. (% change in quantity demanded)/(% change in price) (75/62.5)/ (0.75/ 1.375) = 1.2/0.54= 2.2, since this is greater than 1, demand is elastic. Now, let’s say that demand for brownies was inelastic, which meant that brownie consumers would till purchase brownies regardless of the price increase. So now with the prince increase of \$1.75, consumers buy 95…

• 740 Words
• 3 Pages
Improved Essays
• Improved Essays

1. Please explain inelasticity and elasticity of demand. What happens when there is a tax on luxury items? In economics, elasticity is the measure of responsiveness towards the demand for a product when its price is changed. The basic formula for calculating the elasticity of a product is to divide the percentage change in quantity demanded by the percentage change in price.…

• 1586 Words
• 7 Pages
Improved Essays
• Improved Essays

This is called elasticity. Elasticity is the measurement of how responsive an economic variable is to a change in another. For example, if a company lowers the price of a product, they then begin to wonder how much more of the product they will sell to make up for the price being lowered. There are two kinds of variables in elasticity, called elastic and inelastic variables. An elastic variable is one that changes more than it should when responding to changes in other variables.…

• 1094 Words
• 4 Pages
Improved Essays
• Improved Essays

Ramsey pricing aims to minimise the welfare loss caused by deviating from marginal cost pricing. This pricing technique results in the smallest loss of consumer surplus. It provides the highest total surplus and gives the firm the possibility to break-even (Train, 1991). However, some economists disapprove it because it has a lot of limitations and poses some problems. For example, some customers with inelastic demand, who are charged at a high price, look for alternatives.…

• 2235 Words
• 9 Pages
Improved Essays