Economics Supply And Demand Questions Medium
Cross-price elasticity of demand is a measure of how the quantity demanded of one good changes in response to a change in the price of another good. It measures the sensitivity of demand for one good to changes in the price of another good.
The formula for cross-price elasticity of demand is:
Cross-price elasticity of demand = (% change in quantity demanded of good A) / (% change in price of good B)
If the cross-price elasticity of demand is positive, it indicates that the two goods are substitutes, meaning that an increase in the price of one good leads to an increase in the quantity demanded of the other good, and vice versa. For example, if the price of coffee increases, the demand for tea may increase as consumers switch to a cheaper alternative.
On the other hand, if the cross-price elasticity of demand is negative, it suggests that the two goods are complements, meaning that an increase in the price of one good leads to a decrease in the quantity demanded of the other good, and vice versa. For instance, if the price of smartphones increases, the demand for smartphone cases may decrease as consumers are less willing to purchase both items together.
The magnitude of the cross-price elasticity of demand also provides information about the strength of the relationship between the two goods. A higher absolute value indicates a stronger relationship, while a lower absolute value suggests a weaker relationship.
Overall, cross-price elasticity of demand helps economists and businesses understand how changes in the price of one good affect the demand for another good, allowing them to make informed decisions regarding pricing, marketing, and product development strategies.