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Cross Price Elasticity of Demand With Video Tutorial

This document discusses the concept of cross elasticity of demand, which measures the responsiveness of the quantity demanded of one good to changes in the price of another good. It provides examples of substitute goods having a positive cross elasticity, and complementary goods having a negative cross elasticity. Unrelated goods have a cross elasticity of zero. The document also explains how companies can utilize cross elasticity of demand to establish appropriate pricing strategies.

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36 views

Cross Price Elasticity of Demand With Video Tutorial

This document discusses the concept of cross elasticity of demand, which measures the responsiveness of the quantity demanded of one good to changes in the price of another good. It provides examples of substitute goods having a positive cross elasticity, and complementary goods having a negative cross elasticity. Unrelated goods have a cross elasticity of zero. The document also explains how companies can utilize cross elasticity of demand to establish appropriate pricing strategies.

Uploaded by

Franz Ella Carian
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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College of Business Economics and Management

Bicol University Daraga Campus


Daraga, Albay

MANAGERIAL ECONOMICS

MODULE ___: CROSS PRICE ELASTICITY OF DEMAND


Adopted by: Imelda A. Siapno

Objectives:

The cross elasticity of demand is an economic concept that measures the responsiveness in the quantity
demanded of one good when the price for another good changes. Also called cross-price elasticity of
demand, this measurement is calculated by taking the percentage change in the quantity demanded of
one good and dividing it by the percentage change in the price of the other good.

Substitute Goods

The cross elasticity of demand for substitute goods is always positive because the demand for one good
increases when the price for the substitute good increases. For example, if the price of coffee increases,
the quantity demanded for tea (a substitute beverage) increases as consumers switch to a less
expensive yet substitutable alternative. This is reflected in the cross elasticity of the demand formula, as
both the numerator (percentage change in the demand of tea) and denominator (the price of coffee)
show positive increases.

Complementary Goods

Alternatively, the cross elasticity of demand for complementary goods is negative. As the price for one
item increases, an item closely associated with that item and necessary for its consumption decreases
because the demand for the main good has also dropped.

Unrelated goods

Items with a coefficient of 0 are unrelated items and are goods independent of each other. Items may
be weak substitutes, in which the two products have a positive but low cross elasticity of demand. This
is often the case for different product substitutes, such as tea versus coffee. Items that are strong
substitutes have a higher cross-elasticity of demand. Consider different brands of tea; a price increase
in one company’s green tea has a higher impact on another company’s green tea demand.
Formula for the CPE and Intepretation

Video Lecture for XED


https://youtu.be/DNjOv-L6mRM

What Does a Positive Cross Elasticity of Demand Indicate?

A positive cross elasticity of demand means that the demand for good A will increase as the price of
good B goes up. This means that goods A and B are good substitutes. so that if B gets more expensive,
people are happy to switch to A. An example would be the price of milk. If whole milk goes up in price,
people may switch to 2% milk. Likewise, if 2% milk rises in price instead, whole milk becomes more in
demand.

What Does a Negative Cross Elasticity of Demand Indicate?

A negative cross elasticity of demand indicates that the demand for good A will decrease as the price of
B goes up. This suggests that A and B are complementary goods, such as a printer and printer toner. If
the price of the printer goes up, demand for it will drop. As a result of fewer printers being sold, less
toner will also be sold.
For example, if the price of coffee increases, the quantity demanded for coffee stir sticks drops as
consumers are drinking less coffee and need to purchase fewer sticks. In the formula, the numerator
(quantity demanded of stir sticks) is negative and the denominator (the price of coffee) is positive. This
results in a negative cross elasticity.

Usefulness of Cross Elasticity of Demand

Companies utilize the cross elasticity of demand to establish prices to sell their goods . Products with no
substitutes have the ability to be sold at higher prices because there is no cross-elasticity of demand to
consider. However, incremental price changes to goods with substitutes are analyzed to determine the
appropriate level of demand desired and the associated price of the good.

Additionally, complementary goods are strategically priced based on the cross elasticity of demand. For
example, printers may be sold at a loss with the understanding that the demand for future
complementary goods, such as printer ink, should increase.

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