Cross-Price Elasticity Assignment Help
In economics, four tenets determine the markets for a product – price, demand, supply and elasticity. When you combine three of these concepts, things only get more complicated. And that is precisely why you may have a difficult time trying to understand all the facets of cross-price elasticity of demand.
But do not let the intricacy of the concept deter you from scoring well, for we have a detailed guide on cross-price elasticity fraught with examples and all.
Moreover, if you need customised help beyond this guide, you can hire the economics subject matter tutoring experts at Myassignmenthelp.io.
Now, let us start with the basics.
What Is Cross-Price Elasticity?
Cross-price elasticity is the parameter that ascertains how a product's demand reacts to a shift in a related product's price. This means an increase or decrease in one product's price can affect another product's demand positively or negatively.
You will often see that certain goods are linked to another. For example, the price of fuel impacts almost all goods because a hike in transportation costs automatically affects the price of products that are being shipped. This was an example of a complementary product.
Now, you need to remember that the cross-price elasticity of demand may vary as per the relation of one product to another. Here are the connections to keep in mind:
For a complimentary product A, an increase in its price will lower the demand for another product B. This is known as negative cross-price elasticity. (E.g., potatoes and French fries)
Again, for a price hike of a substitute product A, demand for product B will increase, leading to positive cross-price elasticity. (E.g., tea and coffee)
Also, keep in mind that cross-price elasticity doesn't affect unrelated products. (E.g., pen and butter)
Cross-price elasticity is all about product relationships. Therefore, you must know how to examine and ascertain whether the products in question are substitutes or complements or unrelated.
If you want more guidance on the same, do not hesitate to seek help from our mentors. Tell them what you need, and they will deliver as you requested.
Cross-Price Elasticity Of Demand: Formula
The cross-price elasticity of demand is denoted Exy. It can be calculated by dividing the percentage change in the quantity of product X by the percentage change in the price of a related product Y.
The cross-price elasticity of the demand formula looks like this:
In the above equation:
Qx = the average difference between the previous quantity and the changed quantity
Py = the average difference between the last price and the revised price
(Note: Δ denotes the change of price or quantity of product X or Y)
The average figures may make the equation a lot more complex than apprehended. If you cannot determine how to determine ΔQx or ΔPx, you can use a cross-price elasticity of demand calculator for instant results. Alternatively, you can come to Myassignmenthelp.io for step-by-step guidance on your solutions.
Cross-Price Elasticity Of Demand For Substitute Products
Cross-price elasticity measures how much one products demand is reliant on another related product.
In the case of two substitute products, an increase in one’s price increases the demand for its competing product. Consumers are always on the lookout for cheaper alternatives to maximise utility. The less a person spends on an item, the higher is the level of satiation.
Therefore, when the price of a competing product falls, the phenomenon has a mirroring effect on the substitute product, increasing its demand.
Now, based on the price change, you may get positive or negative cross-price elasticity of demand. An increase in the price of substitutes would mean positive cross-price elasticity due to increased demand for the related product. Again, a fall in a competing product's price would lead to a negative coefficient for the other product due to a fall in demand.
Let us take Pepsi and Coke as the substitute products. If the price of Pepsi increases, consumers will automatically shift to Coke. Again, if the price of Pepsi falls, consumers who used to drink Coke will switch to the former.
Categories Of Substitute Products
There are two kinds of substitutes - close or weak.
- For Close Substitutes, even the slightest increase in price will lead to a heavy demand for the substitute product.
- For Weak Substitutes, the change in demand for a substitute will be comparatively lesser than the change in the price of the other product.
If the examples aren't enough for you to understand the cross-price elasticity for demand between substitute products, you can pore through the samples hosted on our website. You can also hire the best economics experts for tutoring assistance.
Cross-Price Elasticity Of Demand For Complementary Products
In the case of complementary products, the relation between the price of one product and demand for another is inversely proportional. That is, when the price of one product increases, the need for the complementary decreases. This is because of the rise in the joint cost that forces consumers to buy less.
An excellent example of complementary products is petrol and car. When fuel prices go up, the demand for vehicles automatically drops because a vehicle cannot run without fuel. And with a hike in fuel prices, maintaining a car/bike becomes costly.
Categories Of Complementary Products
Similar to substitute products, two complimentary items can have a close or a weak relationship.
- For Close Complements, a minimal increase in price leads to a more significant decrease in demand for the complement item. (E.g., flour and bread)
- For Weak Complements, the demand for a complimentary product decreases to a lesser extent compared to a more significant rise in the price. (E.g., pen and notebooks)
Why are pens and notebooks weak complements as compared to flour and bread? For a more in-depth understanding, get in touch with the instructors at Myassignmenthelp.io. Then, share your session requirements with us right away for instant guidance.
How To Calculate The Scale Of Cross-Price Elasticity Of Demand?
Different sets of products mark different levels on the scale of cross-price elasticity of demand. As explained earlier, complementary goods lead to negative cross-price elasticity. In stark contrast, substitutes lead to positive XED.
If you see the scale of XED above, you will see how complementary solid goods (like flour and bread) mark its extreme left. Next comes the weak complements (like pen and notebook), which has a lesser negative XED.
In the middle of the scale are unrelated products. For example, consider ice cream and snowboarding. There is no relation between the two whatsoever. So, the price of one does not affect the demand for another to any extent. Therefore, the XED for unrelated goods is 0.
On the positive hand of the zero, you can mark the cross-price elasticity of substitutes. On the other hand, weak substitutes demonstrate a less favourable XED than close substitutes. Therefore, inadequate substitutes come after unrelated goods, as healthy substitutes mark the extreme positive end of the scale.
Need more examples to understand the scale of cross-price elasticity? Pore through the hundreds of samples on this topic on our website for free. Or, email us for instant help, and we will appoint the best expert to assist you.
Application Of Cross-Price Elasticity Of Demand
Businesses use the concept of cross-price elasticity of demand to recognise the reliability and quotient of sensitivity of the goods they produce to others. According to the degree of sensitivity, brands set the prices for their offerings.
Quite often, businesses use the loss leader strategy to price complementary goods counterintuitively as a deliberate step. For example, several companies that offer two complementary products, like milk and cheese, choose to price one below cost to increase the sale of the complementary good. This leads to an overall higher profit.
Businesses that offer products with the fierce competition due to close substitutes operating in the market use the competitive pricing strategy. In this strategy, brands try to keep the cost of their product lower than the substitute to attract the latter's demand.
That brings us to the end of this guide.
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Most Important Frequently Asked Questions Searched By Students
Q1. What is the cross-price elasticity (of demand)?
Ans.The cross-price elasticity of demand is a measure of the percentage change in the quantity demanded of one good in response to a percentage change in the price of another good. It is used to measure the degree to which two goods are substitutes for one another or complements.
Q2. The cross-price elasticity of demand is calculated as follows:
Ans.Cross-price elasticity of demand = (percentage change in quantity demanded of good A) / (percentage change in price of good B)
Q3. What is cross price elasticity with the formula?
Ans.Cross price elasticity of demand measures the percentage change in the quantity demanded of one good in response to a percentage change in the price of another good. It is calculated using the following formula:
Cross price elasticity of demand = (percentage change in quantity demanded of good X) / (percentage change in price of good Y)
Q4. What is an example of cross-price elasticity?
Ans.An example of cross-price elasticity would be the relationship between the demand for gasoline and the price of gasoline. If the price of gasoline increases, the demand for gasoline may decrease, as consumers may look for alternative modes of transportation or try to reduce their overall consumption of gasoline. This negative relationship between the price of gasoline and the demand for gasoline demonstrates a negative cross-price elasticity.
Q5. Can Someone write my cross-price elasticity Assignment?
Ans.Cross-price elasticity 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 the first good divided by the percentage change in the price of the second good.
Q6. Where Can I get help with my cross-price elasticity assignment?
Ans.I can certainly help you with your cross-price elasticity assignment. Cross-price elasticity of demand is a measure of how the quantity demanded of one good responds to a change in the price of another good. To calculate cross-price elasticity, you will need to know the following: