There are many types of elasticity of demand. The one most relevant to businesses, however, is the price elasticity of demand, which measures the change in demand as a result of a change in price.
Cross elasticity of demand is denoted by Exy and is mathematically represented as Cross elasticity of demand is one of the major tools that businessmen producers take help from in order to make correct business decisions.
Described below are its few applications in business sector. Determining nature of relationship between any two goods We have already Price elasticity decision making that cross elasticity of demand is the rate of change of demand for one commodity in response to change in price of another commodity.
Cross elasticity of demand can only be measured between any two goods at a time, and the outcome is the representation of the relationship shared by those two goods. Cross elasticity is greater than zero when rise in price of commodity X causes rise in demand of commodity Y.
Such type of response can be observed in substitute goods such as Coke and Pepsi. In the same way, cross elasticity is equal to zero when rise in price of commodity X does not cause any effect on the demand of commodity Y.
This type of response can be seen in goods that are not related to each other such as sugar and shoe. And, cross elasticity is lesser than zero when rise in price of commodity Y causes fall in demand of commodity X.
Such type of response can be seen in complementary goods such as tea and sugar. Forecasting change of demand Cross elasticity can be used by a businessman producer to predict the future demand of his product in case when he has the idea of probable future price of substitute or complementary goods.
From the above information, the manufacturer of Limes can predict by how much the demand of its product will fall as a result of fall in price of Oranges, and thus will be able to make necessary decisions to keep up its revenue.
Classification of market Cross elasticity of demand is also helpful in classifying the type of market. Higher the value of cross elasticity of demand between the products, greater will be the competition in the market, and lower the value of cross elasticity, the market will be less competitive.
In the same way, if cross elasticity is zero or almost zero, there is monopoly or zero competition in the market. Pricing policy Price of one product can directly affect the price of another if they are related to each other.
That is why large firms which produce more than one product must evaluate cross price elasticity between each of their products in order to efficiently price them.
Le t us suppose Oral-D is company which produces toothpaste as well as toothbrush complementary goods. The rise in price of any one of these products causes fall in demand of that product as well as the other. Therefore, the company must be careful while deciding whether or not to increase the price of any product.
Determination of boundaries between industries Concept of cross elasticity helps producers determining boundaries of their industries. Complementary goods belong to different industries.
Thus, the negative value of cross elasticity of demand indicates that the products are from different industries. In the same way, substitute goods belong to same industry. Thus, positive value of cross elasticity of demand indicates that the products are from same industry.Coefficients of Elasticity.
A coefficient is a metric that expresses the income elasticity of demand for a particular product or service. To calculate your coefficient of income elasticity, divide the percentage change in the quantity of demand for a product by the percentage change in income.
The concept of elasticity of demand plays a crucial role in the pricing decisions of the business firms and the Government when it regulates prices.
The concept of price elasticity is also important in judging the effect of devaluation or depreciation of a currency on its export earnings. It has. 12 Importance of Price Elasticity of Demand – Explained! From the above discussion it is amply clear that price elasticity of demand is of great significance in making business decisions.
Home ›› 9 Main Determinants of Price Elasticity of Demand – Explained! Use of Cross Elasticity of Demand in Business Decision Making January 10, By Shraddha Bajracharya Cross elasticity of demand is a measure of degree of change in demand of a commodity due to change in price of another commodity.
Despite this, elasticity analysis does serve as a useful tool for estimating market reaction therefore it leads to make pricing decisions. Price elasticity of demand elasticity plays an important part when it needs to make piecing decision Marketing Essentials: economics knowledge to pricing from a marketing perspective (supply, demand, price elasticity).
Among them, price elasticity of demand is one of the most common types and is also the most relevant to business. Price elasticity of demand can be a useful tool for businessmen to make crucial decisions like deciding the price of goods and services.