In any market niche, there are interchangeable or complementary products, for example, butter and margarine, a monitor and a system unit, etc. A decrease or increase in the value of one of them inevitably affects the demand for the other. To find the degree of this change, you need to determine the coefficient of cross elasticity.
Instructions
Step 1
The consumer's choice is rarely limited to one name. The ability of products to complement or replace each other is called cross-elasticity. Certain product groups are interdependent. The degree of this relationship is indicated by the coefficient of cross elasticity.
Step 2
This ability can be asymmetrical. For example, for some holiday dates, many fitness clubs offer club cards at rather attractive prices. It can be assumed that a significant decrease in prices will cause demand for sportswear. However, it cannot be said for certain that if fitness clothing becomes cheaper, the demand for club cards will increase.
Step 3
The coefficient of cross-price elasticity of demand can be determined by the formula: Ke = ∆Q / ∆P • P / Q, where: P is the price of one product; Q is the volume of demand for another.
Step 4
The value of the coefficient can be greater than or less than zero or equal to it. A negative sign indicates that both products are complementary, i.e. complement each other. This means that if the price of one of them increases, then the demand for the other will fall. The most common examples are automobile and gasoline, automobile and parts. If the prices for the latter are too high, then the demand for cars will fall.
Step 5
A positive value is obtained if the calculation involves these pairs of interchangeable goods. For example, cereals and pasta, butter and margarine, etc. When the price of buckwheat rose sharply, the demand for other products from this category increased: rice, millet, lentils, etc. If the coefficient takes zero value, this indicates the independence of the goods in question.
Step 6
Keep in mind that the cross-elasticity coefficient is not the reciprocal. The magnitude of the change in demand for good x at the price of y is not equal to the change in demand for y at the price of x.
