cross elasticity

Case study of Elasticites of Demand in the real world

By,

Pratik Kabra (20)

Ravi Kadiwar(25)

Nishith Shah(53)

Pritesh Sheth(55)

ELASTICITY

Elasticity of demand is defined as the percentage change in quantity demanded caused by one percent change in the demand determinant under consideration(e.g. price, income, price of related goods etc), keeping other determinants constant.

CROSS ELASTICITY:

A cross elasticity is the effect on the change in demand of one good as a result of a change in price of related goods.

Cross Elasticity may

be Positive or Negative.

POSITIVE CROSS ELASTICITY

When increase in Price of one good results into increase in demand of related goods, The Cross Elasticity of the goods is said to be Positive.

Goods with positive Cross elasticity are substitutes

NEGATIVE CROSS ELASTICITY

When increase in Price of one good results into decrease in demand of related goods, The Cross Elasticity of the goods is said to be Negative.

Goods with negative Cross elasticity are Complementary goods

Estimated Cross-price Elasticity of Demand(Exy) between Selected Commodities

Commodity X Commodity Y Cross- Price Elasticity

Tea (India) Coffee (India) Short run: 0.0385

Tea (India) Coffee (India) Long run: 0.3457

Margarine (US) Butter (US) 1.53

Pork (US) Beef (US) 0.40

Mutton/lamb (UK) Beef/veal (UK) 0.28

Pork (UK) Beef/veal (UK) 0.00

Natural gas (US) Electricity (US) 0.80

Coal (Ireland) Oil (Ireland) 0.70

Coal (Ireland) Natural gas (Ireland) 0.40

Entertainment (US) Food (US) -0.72

European cars US domestic & Asian cars 0.76

Asian cars US domestic & European cars 0.61

US domestic cars European & Asian cars 0.28

Automobile (Australia) Bus transportation (Australia) 0.07



Pork (US) Beef (US) 0.40

Mutton/lamb (UK) Beef/veal (UK) 0.28

Natural gas (US) Electricity (US) 0.80

Coal (Ireland) Oil (Ireland) 0.70

Coal (Ireland) Natural gas (Ireland) 0.40

European cars US domestic & Asian cars 0.76

Asian cars US domestic & European cars 0.61

US domestic cars European & Asian cars 0.28

Automobile (Australia) Bus transportation (Australia) 0.07

• Increase in Price of Commodity X by 1 Percent results into increase in Demand of Commodity Y by less than 1 percent but with different values showing different degree of substitution. (Exy<1 - Relatively Inelastic).

P1

P2

Q1Q2



Tea (India) Coffee (India) Short run: 0.0385

Tea (India) Coffee (India) Long run: 0.3457

• In Long Run Increase in Price of Tea by 1 Percent will result into Increase in Demand of Coffee by 0.34 percent.

• In Short Run Increase in Price of Tea by 1 Percent will result into Increase in Demand of Coffee by just 0.038 percent.

• Long run Cross elasticity of demand for most commodities is much larger than the corresponding short-run Cross Elasticity



Margarine (US) Butter (US) 1.53

• Increase in Price of Margarine by 1 percent will result into increase in demand of Butter by 1.53 percent , i.e there is more than proportionate increase showing high degree of substitution between the goods.(Exy>1 - Relatively elastic)

Pork (UK) Beef/veal (UK) 0.00

• There is no change in demand of Beef/veal due to change in price of Pork in UK. (Exy=0 - Perfectly Inelastic).

Q

P1

P2

P1P2

Q1Q2



Entertainment (US) Food (US) -0.72

• Increase in Price of Entertainment goods by 1 percent leads to a 0.72 percent reduction in the demand for Food in US. This means that both the commodities are complementary to each other and are demanded jointly.

P1

P2

Q1Q2

APPLICATION OF THEORY

Deriving appropriate Pricing Strategy.

Analyze the effect of change in the price of one product to the demand of others.

Elasticity is the concept, economists use to describe the steepness or flatness of curves or functions.

cross elasticity

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