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
Perfect Competition   The model of perfect competition describes a market situation in which there are: i.         Many buyers and sellers to the extent that the supply of

The Spendthrift Economy This assumes a circular flow of income in a closed economy with no Government sector and no foreign trade.   It also assumes the existence of two sect

The optimum output and price level is always determined with the concepts of revenue and costs-the difference in joint or independent production will show in the differences in cos

Where does the firm Operate? The firm will avoid stages I, II and III and will instead choose stage II.  It will avoid stage I because this shall involve using the fixed facto



THE GOVERNED ECONOMY The governed economy contains central authorities often simply called "the government" - who levy taxes on firms and households and which engages in numer

Development of Transportation and Marketing Facilitates: The expansion of an industry may expedite the development of transportation and marketing facilities that will decrease th


Explain cost output relationship with reference to: a.    Total fixed cost and output b.    Total variable cost  and output