Cross elasticity of demand — the indicator characterizing percentage change of size of demand for one goods at the change in price of other goods for 1%. It is used for characteristic of the complementing and interchanging goods. Also this indicator can be applied to delimitation of the industry of the studied goods. To define cross elasticity of goods it is necessary to use a formula of calculation of coefficient of cross elasticity.
It is required to you
- - initial price of goods 1 (P1)
- - final price of goods 1 (P2)
- - initial demand for goods 2 (Q1)
- - final demand for goods 2 (Q2)
Instruction
1. For assessment of cross elasticity it is possible to use two methods of calculation - arc and dot. The dot method of determination of cross elasticity can be used when functional communication of dependent objects is removed (i.e. there is a function of demand or the offer on any goods). The arc method is used when practical observations do not allow to reveal functional dependence between the market indicators interesting us. In this situation the market reaction upon transition from one point to another is estimated (i.e. the initial and final value of the sign interesting us undertakes).
2. In order that it is more clear to explain a method for determining cross elasticity (arc way), we will take a specific objective: what is the cross elasticity of goods equal to if at reduction of the price of margarine from 70 to 63 rubles, sales of oil in shop decreased from 500 to 496 pieces a month? Calculate change of volume of demand for the second goods (in our case butter). ∆Q ₓ= (Q2-Q1)=496-500=-4
3. Calculate the change in price for the second goods (in this example margarine). ∆P ᵧ= (P2-P1)=63-70=-7
4. Calculate coefficient of cross elasticity.E շ= ∆ Q *P ᵧ/∆ P *QE շ= ((-4)*70) / ((-7)*500)=0.08 (at reduction in price on margarine for 1% demand for oil decreased by 0.08%)
5. Analyze the received result. The more than some of cross elasticity, the interrelation of goods is stronger. To the contrary, the this indicator is closer to zero, the relations of replacement or addition are weaker. In this case the coefficient of cross elasticity insignificantly is more than zero. The studied goods belong to goods substitutes. Reduction in price on margarine slightly affects demand for butter. However, at the change in price for oil, demand for margarine will change much stronger. It is caused by the fact that the cross elasticity can have asymmetric character when the dependence of goods has more unilateral character. For example, laptops and covers for laptops. At drop in prices demand for covers for them considerably will increase by laptops. But at reduction of the price of computer covers, demand for laptops will practically not change.