What is cross elasticity?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:47

Recently, you can notice a frequent change in prices for consumer goods. Often such changes occur in a complex manner. They are like a collapsing house of cards, one fall leading to another.

On the other hand, it can be seen that people's incomes do not change at the same rate as prices for goods and services rise. Of course, incomes are also growing, but the rate of their growth is often inferior to the rate of price growth. There is a certain relationship between price changes for one product and demand for another. An indicator that reflects this relationship is called cross elasticity.

Definition

If we talk about elasticity in general, then we can simply say that it expresses the ratio of changes in different indicators. Elasticity can be applied in the field of income, demand, supply. Thanks to the elasticity index, it is possible to predict how the demand for a product will change when its price increases, for example, by ten percent. Or, say, income elasticity shows how the demand for a certain product will change with a change in consumer income.

Cross elasticity is a coefficient that reflects the relationship between the price of one product and the demand for another. This indicator can be positive, negative or zero. If the cross elasticity has a plus sign, then we can talk about the case of comparison of interchangeable goods. In this case, a change in the price of one good inversely affects the change in demand for another.

Negative elasticity is typical for complementary or complementary products. In this case, the influence is proportional to the changes, and as the price of one product rises, the level of demand for another decreases.

Zero cross-elasticity indicates that the goods are not related to each other by any factors. In this case, a change in the level of demand or price of one product will not lead to a change in any indicators of another.

Life Application

Of course, the question arises: “How can a simple person without an economic education apply this knowledge in his own life?”. The answer is quite simple, but it is better to explain it with an example. Thus, with an increase in oil prices, the demand for alternative energy sources increases, which increases their significance and value in the eyes of potential consumers. And subsequently, the real cost of such resources may increase. Previously, no one took the idea of electric vehicles seriously, but as soon as oil prices began to rise significantly, the "powers that be" showed a genuine interest in this area. According to this, the costthe idea itself, as well as its derivatives, increases significantly (due to increased demand).

Cross-elasticity is a very handy tool for analyzing the consumer goods market, but one cannot ignore the accompanying factors. For example, the category of luxury is almost impossible to evaluate in terms of elasticity.