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Cross-Price Elasticity of Demand

幫考網(wǎng)校2020-08-06 14:29:41
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Cross-price elasticity of demand is a measure of the responsiveness of the quantity demanded of one good to a change in the price of another good. It is calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

For example, if the price of coffee increases by 10% and the quantity demanded of tea increases by 5%, the cross-price elasticity of demand between coffee and tea is -0.5 (5%/10%). This means that tea is a substitute for coffee, and as the price of coffee increases, consumers switch to tea, resulting in an increase in the quantity demanded of tea.

On the other hand, if the price of coffee increases by 10% and the quantity demanded of milk remains unchanged, the cross-price elasticity of demand between coffee and milk is zero. This means that coffee and milk are not related goods, and a change in the price of coffee does not affect the quantity demanded of milk.

Cross-price elasticity of demand is an important concept for firms to understand when setting prices and making strategic decisions. If a firm produces a product that is a substitute for another product, it needs to consider the cross-price elasticity of demand when setting its prices. If the price of the substitute product increases, the firm may be able to increase its own prices without losing customers. Conversely, if the price of the substitute product decreases, the firm may need to lower its prices to remain competitive.
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