Major determinant of Cross-elasticity of Demand

Major determinant of Cross- ginger snap of DemandWhen it comes to Cross-elasticity of regard, we must first illustrate the concept of elasticity of aim. We can articulate that elasticity of demand is the foundation of the theory of soft touch-elasticity of demand because elasticity of demand is related to only one good while cross-elasticity of demand is about the analogy of 2 goods. We should first compargon the elasticity of demand with the cross-elasticity of demand.Introduction of Elasticity of DemandElasticity of demand is often referred to as the own- footing elasticity of demand for a certain good, such as the elasticity of demand with take to be to the price of a good. Elastic demand reflects that consumers are very price sensitive.This concept is graspable because we all know price is one of important determinant of quantity, and the quantity demanded of a good is ostracisely related to its price. We can say for a seller, rase price promotes sales for a buyer, hig h price constraints their desire of purchase.Take the example from the textbook, suppose that a 10% join on in the price of an ice-cream chamfer causes the amount of ice cream you buy to fall by 20%. According to the formulaWe calculate your elasticity of demand as 20%/10%= 2. This result can be explained as the elasticity 2 reflects the vary in the quantity demanded is twice as large as the change in the price in proportion. This result owes to reasons as follows First, market for ice cream is very competitive instead of monopolistic. Second, consumers have choices of new(prenominal) substitutes such as other desserts. Third, when the price of ice cream rises, consumers can buy cakes, milk-shake or other desserts.The above formula usually yields a negative value, because of the inverse nature of the family relationship between price and quantity demanded. They are described by the law of demand (Gillespie, Andrew (2007). p.43.) but economists tend to refer to price elasticity of demand as a cocksure value (i.e., in absolute value terms).Definition of Cross-elasticity of DemandBased on the theory mentioned above about price elasticity of demand, we can go further to find out the relation of devil goods. In order to distinguish it from the elasticity of demand for that good with respect to the change in the price of some other good, i.e., a complementary or substitute good. (Png, Ivan (1999). p.57.) The latter type of elasticity measure is called a cross-price elasticity of demand.In microeconomics, cross-elasticity of demand is also called cross-price elasticity of demand, which measures the responsiveness of the demand for a good when in that respect is a change in the price of another good. According to its definition, it is deliberate as the change in demand in percentage for the good A that occurs in response to a change in price in percentage of the good B. The formula to calculate cross-elasticity of demand is as followsMajor DeterminantThe cros s-price elasticity of demand is often utilize to see how sensitive the demand for a good is to a price change of another good. The major determinant of cross-elasticity of demand is the closeness of the substitute or complement. A high positive cross-price elasticity indicates that if the price of a certain good goes up, the demand for the other good goes up as well. A negative one tells us the icy that an increase in the price of one good causes a decrease in the demand for the other good. A small value (either negative or positive) tells us that there is little or no relation between the two goods. They are listed in the table belowCross-price ElasticityIndication guinea pigGraphA positive cross-price elasticityIf the price of one good goes up, the demand for the other good goes up as well.Pork and chicken, etc.A negative cross-price elasticityAn increase in the price of one good causes a drop in the demand for the other good.Bicycles and helmets Petroleum and cars, etc.A small valueThere is little relation between the two goods.Things have little or no relation at allFor example, if we suppose the price of chicken goes up by 20%, and as a result the quantity demanded of pork increases by 10%, at the premise that there is no change in the price of pork or anything else that would have influence on the demand for pork (such as quality, advertising, location, etc). Then the cross-elasticity of demand for pork, with respect to the price of chicken, is 10%/20% = 0.5.This concept is also easy to understand. Firstly, as we know that for two goods that complement each other show a negative cross elasticity of demand, which means that an increase in the price of one good cuts the demand for the other. For instance, if the price of bicycles goes up, we get out expect to see a defy in the demand for bike helmets if the price of petroleum goes down, the demand for car will be expected to rise. In this sort of case, we can say the goods are complements and they hav e a close link in price and demand.Secondly, on the contrary, two goods that are substitutes have a positive cross elasticity, it means that an increase in the price of one good will therefore increase the demand for the other good. When we observe a positive cross-elasticity, we can assume that the two goods are substitutes, as with chicken and pork, butter and margarine.The Third circumstance is two independent goods. If two goods are independent, undoubtedly they have a zero cross elasticity of demand.Practical ApplicationFor firms and corporations, it is necessary for them to know the cross-elasticity of demand for their products when they consider the effect on the demand for their products of a change facing with the challenging price of a rivals product or a complementary product. If the quality and appearance is almost the same (regardless of the factors of affection location, and loyalty, etc.) but the price of Firm A is higher than that of Firm B, most consumers will choos e the products of Firms B. Among theories of marketing, pricing is not only difficult but technical. These are vital pieces of information for firms when making their production and strategical plans.However, for goods those complement each other, a firm is supposed to promote the sales of both the products and their complements. Nowadays, the price of petroleum is constantly high and it will continuously prolong higher in the near future. This is definitely a disaster for automotive industry. Some of the automobile companies adopt the strategy of reduction but demoralizes an unsatisfactory feedback. What affects the finding of a consumer is mainly the price of petroleum instead of the automobile, so some companies think out of a promotional tactic buy car get petro discounted (though the price of a car may be very expensive), and this may be to some extent cater to the consumers psychology.Another application of the concept of cross-elasticity of demand is in the field of inter national trade as well as the balance of payments around the world. Whats more, for different industries and fields, the concept of cross-elasticity of demand can be used to measure the closeness of relation of each other. For those monopoly enterprises, they are the unique suppliers in market and they are powerful enough to control the whole market, so they system suffer the pressure from others. However, for some industries, such as Ministry of Railway, if it decides to raise the price in a large scale, many passengers will prefer other transportation, which will make aviation industry or highroad industry prosperous. This will undoubtedly lay itself in an unadvantageous position.