Cross Elasticity

1. Cross Elasticity

2. What is Cross Elasticity?
• When two goods are substitutes or complementary, a change in the
price of one causes a change in the quantity of the other goods
purchased. The ratio of the change is called Cross Elasticity.
Cross Elasticity
% Change in Demand For A
% Change in Price of B
= =
i
E

3. If A and B are substitutes, the cross elasticity
will be positive.
5
.
1
2
3
coffe
of
price
in
Change
%
for tea
demand
in
Change
%
.
. 



g
e
If A and B are complementary , the cross elasticity
will be negative.
5
.
1
2
3
bikes
of
price
in
Change
%
petrol
for
Demand
in
Change
%
.
. 




g
e

4. If A and B are neutral , the cross elasticity
Will be 0 , because in price of the commodity
does not affect the demand for other.
We will consider the following important
Determinations of cross elasticity.

5. 1. Complementary Products:-
In the case of complementary products , a change in the price
of a good will have an opposite reaction on the demand for the
other commodity which is closely related or complementary.
For example , a increase in demand for pen will necessarily
increase the demand for ink and vice versa. The same is the
case with complementary goods such as bread and butter ;
horse carriages, etc.
2. Alternate Products:-
In the case of Alternate commodities , the cross demand curve
slops upwards showing that more quantities of a commodity ,
will be demand whenever there is a rise price of a substitute
commodity.

6. DEMAND DIFFERENCES

7. Producer’s goods & Consumer’s goods
Producer’s goods
• Producers goods are goods
which are used for the
production of other goods-
either consumers goods or
producer goods themselves.
• For examples of such goods are
machines, ships etc.
Consumer’s goods
• Consumer’s goods are goods
which are used for final
consumption.
• For examples consumer’s goods
are readymade clothes , prepared
food , residential houses, etc.

8. Durable goods & Non-Durable goods
Durable goods
• Durable goods are which can be
consumed more then once over a
period of time.
• The demand for durable goods is
likely to be derived demand .
• For example car ,refrigerator,
readymade shirt & umbrella.
Non-durable goods
• Non-durable goods are which
can’t be consumed more then
once.
• These will mate only the current
demand.
• For example instance
bread,milk,etc.

9. Derived demand & Autonomous demand
Derived demand
• When the product Is demanded a
consequent of purchase of a
parent product.
• For example the demand for
cement is derived demand, being
directly related to building
activity.
Autonomous demand
• When the demand for the
product is independent of the
demand for other goods.
• But this distinction is purely
arbitrary and it is very difficult to
find which product is entirely
independent of the other product.

10. Industry demand & company demand
Industry demand
• This demand means the demand
is used to denote the total
demand for the product of a
particular industry.
• For example the total demand for
steel in the country.
Company demand
• Company demand means the
demand denotes demand for the
products of a particular company.
• for example demand for steel
produced by Tata iron & steel
company.

11. Short-run demand & Long-run demand
Short-run demand
• Short-run demand means to
demand with its immediate
reaction to price changes, income
fluctuation,etc….
• If electricity rates are reduced in
the short run, the existing user
will make greater use of electric
appliances.
Long-run demand
• While long run demand means
the demand which will ultimately
exist as a result of changes in
pricing promotion or product
improvement after enough time is
allowed to let the market adjust
to the new situation.
• In the long run, more and more
people will be induced to use
electric appliances.