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Definition: The measure of responsiveness of the demand for a good towards the change in the price of a related good is called cross price elasticity of demand. It is always measured in percentage terms. Description: With the consumption behavior being related, the change in the price of a related good leads to a change in the demand of another good. Related goods are of two kinds, i.e. substitutes and complementary goods. In case the two goods are not related, the Coefficient of Cross Elasticity is zero. In case the two goods are substitutes for each other like tea and coffee, the cross price elasticity will be positive, i.e. if the price of coffee increases, the demand for tea increases. On the other hand, in case the goods are complementary in nature like pen and ink, then the cross elasticity will be negative, i.e. demand for ink will decrease if prices of pen increase or vice-versa. Watch the video to learn more about Cross Elasticity of Demand Also See: Elasticity, Microeconomics, Consumer Theory, Income Elasticity of Demand, Price Elasticity of Demand, Demand Elasticity
Business men know that they face demand curves, but rarely do they know what these curves look like. Yet sometimes a business needs to have a good idea of what part of a demand curve looks like if it is to make good decisions. If Rick's Pizza raises its prices by ten percent, what will happen to its revenues? The answer depends on how consumers will respond. Will they cut back purchases a little or a lot? This question of how responsive consumers are to price changes involves the economic concept of elasticity. As developed by Alfred Marshall, the concept of elasticity was applied to elasticity of price. But later on, the concept was made more broader. Elasticity of demand is a concept of showing the responsiveness of demand. As we well-known earlier, changes in demand can be caused by several factors which determine demand for a good or commodity. Obviously, demand is responsive to each of these factors i.e. But all the factors are not equally important from the point of view of either theoretical analysis or practical means. For example, take tastes or preference of the consumers, is an exogenous factor and there is no point in measuring the responsiveness of demand to this factor, though in practice this factor is important. Efforts, therefore are made to measure the responsiveness of demand to changes in certain important factors like price, income, prices of related products, sales promotion etc. Let us take price as a factor for understanding the elasticity concept. When considering the responsiveness of the quantity demanded to change in price of a commodity, we may make some statements such as : 'The demand for sugar was more responsive to price-changes twenty years ago than it is today', or the demand for milk responds more to price changes than does the demand for tea'. It is thus clear that the degree of responsiveness of quantity demanded to price changes varies from product to product. Elasticity of demand indicates the degree of responsiveness of quantity demanded to changes in market price. Hence this becomes the concept of price-elasticity of demand. DEGREES OF PRICE ELASTICITY Different commodities have different price elasticities. Some commodities have more elastic demand while others have relative elastic demand. Basically, the price elasticity of demand ranges from zero to infinity. It can be equal to zero, less than one, greater than one and equal to unity. According to Dr. Marshall : "The elasticity or responsiveness of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price and diminishes much or little for a given rise in price."However, some particular values of elasticity of demand have been explained as under ; Types of Price Elasticity of Demand:-
MEASUREMENT OF PRICE ELASTICITY OF DEMAND There are five methods to measure the price elasticity of demand.
Total Expenditure Method Dr. Marshall has evolved the total expenditure method to measure the price elasticity of demand. According to this method, elasticity of demand can be measured by considering the change in price and the subsequent change in the total quantity of goods purchased and the total amount of money spend on it. Proportionate Method This method is also associated with the name of Dr. Marshall. According to this method, "price elasticity of demand is the ratio of percentage change in the amount demanded to the percentage change in price of the commodity." It is also known as the Percentage Method, Flux Method, Ratio Method, and Arithmetic Method. What measures the responsiveness of quantity demanded to a change in price?Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded—or supplied—divided by the percentage change in price.
What is the measure of responsiveness of demand?The measure economists use to describe the responsiveness of demand for a good or service to a change in the price of another good or service is called the cross price elasticity of demand, e A, B.
What is the measure of the responsiveness of the demand for a commodity to the change in outlay on advertisement and other promotional efforts?Advertising elasticity of demand (AED) is a measure of a market's sensitivity to increases or decreases in advertising saturation.
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What is the measure of responsiveness of demand to the changes in price called?
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