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Cross Elasticity of Demand
Cross Elasticity of Demand
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Substitute Goods
The cross elasticity of demand for substitute goods is always positive because the demand for one
good increases if the price for the other good increases. For example, if the price of co ee increases,
the quantity demanded for tea (a substitute beverage) increases as consumers switch to a less
expensive yet substitutable alternative. This is reflected in the cross elasticity of demand formula, as
both the numerator (percentage change in the demand of tea) and denominator (the price of co ee)
show positive increases.
Complementary Goods
Alternatively, the cross elasticity of demand for complementary goods is negative. As the price for
one goods increases, an item closely associated with that item and necessary for its consumption
decreases because the demand for the main good has also dropped. For example, if the price of
co ee increases, the quantity demanded for co ee stir sticks drops as consumers are drinking less
co ee and need to purchase fewer sticks. In the formula, the numerator (quantity demanded of stir
sticks) is a negative figure and the denominator (the price of co ee) is positive. This results in a
negative cross elasticity.
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12/3/2017 Cross Elasticity Of Demand
Additionally, complementary goods are strategically priced based on cross elasticity of demand. For
example, printers may be sold at a loss with the understanding that the demand for future
complementary goods, such as printer ink, should increase.
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Price elasticity of demand is a measure of the relationship between a change in the quantity
demanded of a particular good and a change in its price. Price elasticity of demand is a term in
economics o en used when discussing price sensitivity. The formula for calculating price elasticity of
demand is:
If a small change in price is accompanied by a large change in quantity demanded, the product is
said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change
in price is accompanied by a small amount of change in quantity demanded.
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Demand Elasticity
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Demand elasticity refers to how sensitive the demand for a good is to changes in other economic
variables, such as the prices and consumer income. Demand elasticity is calculated by taking the
percent change in quantity of a good demanded and dividing it by a percent change in another
economic variable. A higher demand elasticity for a particular economic variable means that
consumers are more responsive to changes in this variable, such as price or income.
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Income Elasticity Of
Demand
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Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain good to
a change in real income of consumers who buy this good, keeping all other things constant. The
formula for calculating income elasticity of demand is the percent change in quantity demanded
divided by the percent change in income. With income elasticity of demand, you can tell if a
particular good represents a necessity or a luxury.
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