Cross Price Elasticity Assignment Answers
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Demand’s Elasticity of Cross Price
Cross elasticity and elasticity of cross-price is the same thing. In economics, it measures reactivity of quantity which is demanded for any product due to change in amount of another commodity. It is estimated as a percentage change in the first product’s quantity requested which occurs due to a difference in the price of second product. For example, demand for coffee increases if price of tea increases and vice versa.
It effects on two types of goods one which are complementary goods and goods which are substitute in nature. Both are discussed below in brief.
Complementary Goods in Cross Price Elasticity
For complementary goods, the cross-price is always negative. This is because when the price of one product increases, an item or product closely related to the increased price item will have a decrease in its consumption. This is because of the use of the thing whose price increased also dropped, so the usage of complementary goods also falls.
For example, if price of petrol increases the consumption or usage of car decreases as well as car sales drop. Since the petrol price increases, people use it less so fewer cars are used so eventually the sale of vehicles drop significantly. In this approach, the numerator is negative, and the denominator is positive. So, the result is negative cross price elasticity. Order Cross Price Elasticity homework answers for more useful examples and information.
Substitute goods in Cross Price Elasticity
It is always positive as demand for a substitute product increases if price of one product increases. An example will help in explaining it, if coffee price increases the tea’s demand which is a substitute product will increase. This is because as coffee’s amount rises consumers will shift to an alternative. This is positive because in this approach both numerator and denominator have positive increase. Order Cross Price Elasticity homework answers for details.
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