CROSS

ELASTICI
TY
OF
(Exploring the Impact of Price Changes
On Related Products)
Presented by:
Gyana (23DM008)
Ajitesh (23DM020)
Prasad (23DM027)
 Table of Contents
01 02 03
Introduction Function Formula

04 05 06
Interpretation Calculation Importance

07 08 09
Influencing Factors Application Limitations
 INTRODUCTION
> The Cross Elasticity Of Demand (Ex,y) measures the
responsiveness of the quantity demanded of one good
to a change in the price of another good.

> Importance:
> It helps in making strategic decisions and
understanding how products are related in the market.
FUNCTION Dx = f (Ps or Pc)
of
Where,
Ex,y (LHS) Dx = Demand of Product X

(RHS) PS = Price of its subsidiary Product

Pc = Price of its complementary Product

 FORMUL
A
Percentage Change in Quantity of X
Ex,y =
Percentage Change in Price of Y

= = =
 INTERPRETATION
1. If X & Y 2. If X & Y
3. If X & Y
are are
are
Substitute Complement
Unrelated
Goods then, ary Goods
goods then,
then,
Ex,y > 0
Ex,y < 0 Ex,y = 0
 1. X & Y are
Substitute
Goods
Observations:

when Px Increases Dy also increases (Direct Relationship)

How It Happens?

If Px increases, then Dx decreases which leads to an increase in

Dy and vice versa
 2. X & Y are Complementary Goods

Observations:

When Px Increases Dy decreases (Indirect

Relationship)

How It Happens?

If Px increases, then Dx decreases which leads to a

decrease in Dy and vice versa
 Calculation Examples
1. Substitute Goods
Scenario:

Let's assume the price of coffee increases by 10%, and as a result, the quantity
demanded for tea increases by 8%
Percentage Change in Quantity of X 8%
Ex,y = = = 0.8
Percentage Change in Price of Y 10%

So Ex,y = 0.8. It suggests that these goods are substitutes; for every 1% increase
in the price of coffee, the quantity demanded for tea increases by 0.8
 Calculation Examples
2. Complementary Goods

Scenario:
Let's assume the price of Printer Ink Cartridges increases by 15%, and as a
result, the quantity demanded for Printer decreases by 10%

Percentage Change in Quantity of X -10%

Ex,y = = = -0.67
Percentage Change in Price of Y 15%

So Ex,y = -0.67. It suggests that these goods are complementary: for every 1%
increase in the price of Printer Ink Cartridges, the quantity demanded for
Printer decreases by -0.67
 Importance in Business

Strategic Product
Decision Making Development

Pricing Forecasting
Strategy Demand
Influential Factors

Time horizon

Consumer preferences

Availability of close substitutes

 Application of Cross Elasticity of
Demand
> Higher indirect taxes on goods such as tobacco- the impact on demand for

nicotine patches and other substitutes.

> Rise in the price of natural gas - effect on the demand for coal used in power

generation.
> The surge in Fuel prices led to decreased sales

of fuel-run Cars.
 Limitations
> Assumption of “Ceteris Paribus” (All other things remaining

Constant)

> Difficulty in determining Casuality.

> Change of consumer preferences over time.

 Conclusion
> It helps in navigating the dynamic of Demand and Pricing of the goods

in this competitive market.

> It facilitates more data-driven decisions.

> It provides insights about the competitor’s

product which helps in remaining agile &

responsiveness.
Thank You…