Cross elasticity, Managerial Economics

Cross Elasticity

Cross elasticity of demand measures the degree of responsiveness of the quantity demanded of one good (B) to changes in the price of another good (A).  It is measured as follows:

Ex  =  Percentage change in quantity demanded of B

          Percentage change in Price of A.

This may be written mathematically as follows:

Ex  =  DQB/QB

         DPA/PA

       =  AQB     ·   PA

           DPA         QB

In the case of complementary goods, such as cars and petrol, a face in the price of one will bring about an increase in the demand for the other.  Thus we are considering a cut in price (-) bringing about a rise in demand (+).  This therefore means that for complements, the Ex is negative.

Conversely, substitute goods such as butter and margarine might be expected to have a positive Ex because a rise in price of one (+) will bring about a rise in the demand for the other (+).

The value of Ex may vary from minus infinity to plus infinity.  Goods which are close to complements or substitutes will tend to exhibit a high cross-elasticity of demand.  Conversely, when there is little or no relationship between goods then the Ex will be near zero.

Posted Date: 11/27/2012 6:39:26 AM | Location : United States







Related Discussions:- Cross elasticity, Assignment Help, Ask Question on Cross elasticity, Get Answer, Expert's Help, Cross elasticity Discussions

Write discussion on Cross elasticity
Your posts are moderated
Related Questions

DIGRESSIVE TAX A tax is called digressive when the higher incomes do not make a due contribution or when the burden imposed on them is relatively less. Another way in which

Equilibrium Income In this model, aggregate desired expenditure has three components:  Consumption, Investment and Government Expenditure:

Q. Explain about Time series analysis? An analysis of relationship between variables over a period of time. Time-series analysis is helpful in assessing how an economic or othe

MONOPOLISTIC PRACTICES The following practices may be said to characterize monopolies. Exclusive dealing to supply and collective boycott Producers agree to supply onl

Q. Analysis of team production? Harold Demsetz and Armen Alchian's analysis of team production is a clarification and amplification of earlier work by Coase. According to them,

Consider the following table. It shows the market shares of seven clothing stores (A to G) in five dissimilar cities. a) Calculate the Herfindahl index (?H) for each city.

McDonalds has been operating in many Asian countries such as China, Singapore and Japan. However, McDonalds has yet to open its ?rst restaurant in Vietnam, a country with over 80 m

discuss the validity in zimbabwe of the grounds on which the profit maximising model of the firm has been defended

Q. Describe Managerial and behavioural theories? It was only in 1960s that neo-classical theory of firm was disputed by alternatives like behavioural and managerial theories. M