Cross Price Elasticity of Demand The cross elasticity of demand measures the responsiveness of the quantity demanded a good to a change in the price of another good. If the cross elasticity is negative, the commodities are compliments. If the cross elasticity is positive, the commodities are said to be substitutes.

1. Cross Price Elasticity of Demand
Unit 17
Instructor:
Atta Hussain Syed

3. 3.CROSS ELASTICITY OF DEMAND
• The cross elasticity of demand measures the responsiveness of
the quantity demanded for a good to a change in the price of
another good.
• If the cross elasticity is negative, the commodities are
compliments.
• If the cross elasticity is positive, the commodities are said to be
substitutes.

4. 3.CROSS ELASTICITY OF DEMAND
• The cross elasticity of demand for goods X and Y can be expressed as:

5. Example 01:
3.CROSS ELASTICITY OF DEMAND

6. Example 02:
1GB flash cards go down in price from
Rs.250 to Rs.165
MP3 players demanded goes up from
13’000 to 18’000 in the same time
period.
X = MP3 players, Y = flash cards
-1.13 tells us the goods are fairly
complementary
3.CROSS ELASTICITY OF DEMAND

7. Example 03:
The demand for petrol rises from 500 to 600 Barrels when
the price of a particular scooter is reduced from Rs. 25000 to
Rs.22000. Find out the cross elasticity of demand for the
two. What is the nature of their relationship?
3.CROSS ELASTICITY OF DEMAND

8. • Advertising elasticity of demand is a measure of how
much advertising expenditure affects the demand for a
good or service
• Advertising elasticity of demand is a measure of
an advertising campaign's effectiveness in generating new
sales.
4. ADVERTISING ELASTICITY OF
DEMAND

9. • It is calculated by dividing the percentage change in the
quantity demanded by the percentage change
in advertising expenditures.
• This is also known as promotional elasticity of demand.
4. ADVERTISING ELASTICITY OF
DEMAND

10. 4. ADVERTISING ELASTICITY OF DEMAND

11. Example:
4. ADVERTISING ELASTICITY OF DEMAND

12. 4. ADVERTISING ELASTICITY OF DEMAND

13. Factors influencing advertisement elasticity of demand.
4. ADVERTISING ELASTICITY OF DEMAND

14. Using Elasticity in Managerial Decision Making
• The concept of price elasticity of demand has important
practical applications in managerial decision-making.
• Uses of price elasticity can be point out as below:

15. 1. Price fixation:
• Each seller under monopoly and imperfect competition has
to take into account the elasticity of demand while fixing
their price.
• If the demand for the product is inelastic, he can fix a
higher price .
Using Elasticity in Managerial Decision Making

16. 2. Price discrimination:
• A monopolist adopts a price discrimination policy only
when the elasticity of demand of different consumers or
sub-markets is different.
• Consumers whose demand is inelastic can be charged a
higher price than those with more elastic demand.
Using Elasticity in Managerial Decision Making

17. 3. Public utility pricing:
• In case of public utilities which are run as monopoly
undertakings e.g. elasticity of water supply railways postal
services, price discrimination is generally practiced,
charging higher prices from consumers or users with
inelastic demand and lower prices in case of elastic
demand.
Using Elasticity in Managerial Decision Making

18. 4. Super Markets:
• Super-markets are a combined set of shops run by a
single organization selling a wide range of goods.
• They are supposed to sell commodities at lower prices
than charged by shopkeepers in the bazaar.
• Hence, price policy adopted is to charge slightly lower
price for goods with elastic demand.
Using Elasticity in Managerial Decision Making

19. 5.Shifting of tax burden:
• It is possible for a business to shift a commodity tax in
case of inelastic demand to his customers.
• But if the demand is elastic, he will have to bear the tax
burden himself, otherwise demand for his goods will go
down sharply.
Using Elasticity in Managerial Decision Making

20. 6.Production:
• Producers generally decide their production level on the
basis of demand for their product.
• Hence elasticity of demand helps to fix the level of output.
Using Elasticity in Managerial Decision Making