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Positive value of the cross elasticity coefficient of two goods. Cross Elasticity

It is the ratio of the percentage change in demand for one good to the percentage change in the price of some other good. Positive value magnitude means that these goods are interchangeable (substitutes), negative meaning shows that they are complementary (complements). Cross Elasticity demand is calculated using formula (5.4):

where is the superscript D means it's elasticity of demand,

subscript AB suggests that this is cross elasticity of demand, where under A And B any two goods are meant.

That is, cross elasticity of demand shows the degree of change in demand for one product ( A) in response to a change in the price of another good ( B) . Depending on the values of the receiving variable E distinguish the following connections between goods A And B:

1) – substitute goods, i.e. with an increase in the price of the product IN demand for goods will increase A(two brands of washing powder);

2) – complementary goods, i.e. increase in the price of goods IN will lead to a decrease in demand for the product A(these are laptops and their accessories);

3) – independent goods from each other, i.e. change in product price B does not affect the consumption of the product in any way A.

5.2. Elasticity of supply

Elasticity of supply- the degree of change in the quantity of goods and services offered in response to changes in their price.

Supply elasticity coefficient- a numerical indicator that makes it possible to estimate by what percentage the value of the offered product will change when the price of this product changes by 1%.

The process of increasing elasticity of supply in the long and short term is revealed through the concepts of instantaneous, short-term and long-term equilibrium.

Price elasticity of supply is calculated by formula (5.5):

where is the superscript S means that this is the elasticity of supply, and the subscript p suggests that this is the price elasticity of supply (from English words Suplay - offer and Price - price).

Depending on these indicators there are:

1) – perfectly inelastic supply, i.e. the quantity supplied does not change when the price changes;

2) – inelastic supply

3) – unit elasticity of supply, i.e. when the price changes by 1%, the supply changes by 1%;

4) – elastic supply, i.e. when the price changes by 1%, the supply changes by more than 1%;

5) – absolutely elastic supply, i.e. The quantity supplied is not limited when the price falls below a certain level.

The elasticity of supply depends on:

Features of the production process (allows the manufacturer to expand production of a product when its price increases or switch to the production of another product when prices decrease);

Time factor (the manufacturer is not able to quickly respond to price changes on the market);

Inability of this product for long-term storage.

5.3. Practical significance elasticity theory

The theory of elasticity has great importance for determining economic policy firms and governments.

CROSS PRICE ELASTICITY OF DEMAND expresses the relative change in the volume of demand for one good when the price of another good changes, all other things being equal.

There are three types of cross price elasticity of demand:

Positive;

Negative;

Zero.

Positive cross Price elasticity of demand refers to interchangeable goods (substitute goods). For example, butter and margarine are substitute goods; they compete in the market. An increase in the price of margarine, which makes butter cheaper in relation to new price margarine, causes an increase in demand for butter. As a result of an increase in the demand for oil, the demand curve for it will shift to the right and its price will rise. The greater the substitutability of two goods, the greater the cross-price elasticity of demand.

Negative cross Price elasticity of demand refers to complementary goods (related, complementary benefits). These are goods that are shared. For example, shoes and shoe polish are complementary goods. An increase in the price of shoes causes a decrease in the demand for them, which, in turn, will reduce the demand for shoe polish. Consequently, with a negative cross elasticity of demand, as the price of one good increases, the consumption of another good decreases. The greater the complementarity of goods, the greater will be the absolute value of the negative cross price elasticity of demand.

Zero cross Price elasticity of demand refers to goods that are neither substitutable nor complementary. This type of cross price elasticity of demand shows that consumption of one good is independent of the price of another.

The values of cross price elasticity of demand can vary from “plus infinity” to “minus infinity”.

Cross price elasticity of demand is used in the implementation of antitrust policy. To prove that a particular firm is not a monopolist of a particular good, it must prove that the good produced by this firm has a positive cross-price elasticity of demand compared to the good of another competing firm.

An important factor, which determines the cross price elasticity of demand, are the natural characteristics of goods, their ability to replace each other in consumption .

Knowledge of the cross price elasticity of demand can be used in planning. Let's assume that natural gas prices are expected to rise, which will inevitably increase the demand for electricity, since these products are interchangeable in heating and cooking. Suppose that the long-run cross price elasticity of demand is 0.8, in which case the price increase natural gas by 10% will lead to an increase in the volume of electricity demand by 8%.

The measure of the interchangeability of goods is expressed in the value of the cross-price elasticity of demand. If a small increase in the price of one good causes a large increase in the demand for another good, then they are close substitutes. If a small increase in the price of one good causes a large decrease in the demand for another good, then they are close complementary goods .

COEFFICIENT OF CROSS ELASTICITY OF DEMAND BY PRICE - an indicator expressing the ratio of the percentage change in the volume of the demanded good to the percentage ratio of the price of another good. This coefficient is determined by the formula:

The coefficient of cross price elasticity of demand can be used to characterize the interchangeability and complementarity of goods only with minor price changes. Large price changes will trigger the income effect, causing demand for both goods to change. For example, if the price of bread decreases by half, then the consumption of not only bread, but also other goods, will probably increase. This option may be regarded as complementary benefits, which is not legal.

According to Western sources, the elasticity coefficient of butter to margarine is 0.67. Based on this, when the price of butter changes, the consumer will react with a more significant change in demand for margarine than V the opposite option. Consequently, knowledge of the coefficient of cross price elasticity of demand makes it possible for entrepreneurs producing interchangeable goods to more or less correctly set the volume of production of one type of good with the expected change in prices for another good.

PRICE ELASTICITY OF SUPPLY is an indicator of the degree of sensitivity, the response of supply to changes in the price of a product. It is calculated using the formula:

The method for calculating the elasticity of supply is the same as the elasticity of demand, with the only difference being that the elasticity of supply is always positive, because the supply curve has an “ascending” character. Therefore, there is no need to conditionally change the sign of the elasticity of supply. The positive value of supply elasticity is due to the fact that more high price encourages producers to increase output.

The main factor in the elasticity of supply is time, because it allows producers to respond to changes in the price of a product.

Highlight three time periods:

-current period– the period of time during which producers cannot adapt to changes in the price level;

-short period– the period of time during which producers do not have time to fully adapt to changes in the price level;

-long period- a period of time sufficient for producers to fully adapt to price changes.

The following are distinguished: forms of elasticity of supply:

-elastic supply– the quantity supplied changes by higher percentage, than the price when the elasticity is greater than one (E s > 1). This form of elasticity of supply is characteristic of a long period;

The demand for a product also depends on the prices of other goods.

Cross elasticity coefficient demand is the ratio of changes in the volume of demand for a product ί to the change in the price of the product that caused it ј :

There are arc and point cross elasticity.

Arc elasticity- this is an indicator of the average reaction of the volume of demand for one product to a change in the price of another product over a certain segment.

Point elasticity characterizes the linear relationship between the price of one good and the volume of demand for another. To calculate it use the following formula:

The cross-elasticity coefficient can be either positive or negative (Fig. 5.23); it indicates the type of relationship between goods, that is, its absolute value reflects the degree of this relationship. The higher the cross elasticity of demand, the higher the degree of substitutability of goods; the lower the value of cross elasticity, the greater the complementarity of goods.

This is important for developing a general and pricing strategy for organizations, since one should take into account not only the possibility of competition between substitute goods (replaceable goods), but also the availability and price trends of complementary goods (for example, the housing market and the building materials, automobile market and automobile fuel market).

Goods are interchangeable(Fig. 5.23 a): 0<ε Р d ij< ∞.

The cross elasticity coefficient will be a positive value and vary from 0 to ∞. This means that when the price of a good changes j demand for the good i will change in the same direction. For example, reducing the price of a good j will cause a decrease in demand for the good i and vice versa.

Complementary benefits(Fig. 5.23 b): ε Р d i< 0.

The cross elasticity coefficient will be negative. This means that when the price of a good changes j demand for the good i changes in the opposite direction. For example, reducing the price of a good j will cause an increase in demand for the good i, and vice versa.

Goods that are independent of each other in consumption(Fig. 5.23 c) have zero cross-elasticity, that is, an increase in prices for one product is in no way related to either consumption or changes in demand for another product.

Practical significance of elasticity of demand is that different cases of elasticity directly affect the revenue received by the manufacturer ( TR) and consumer spending.

TR = P∙Q,

Where R- the price of this product, Q– quantity of goods purchased.

The elasticity value will be different at different points on the curve (Fig. 5.24).

The elasticity of the linear demand function varies from 0 (at the point of intersection of the linear demand curve and the x-axis) to ∞ (at the point of intersection of the linear demand curve and the y-axis).

If demand is price elastic (ε Р d >1), then a decrease in price will cause an increase in revenue (since a slight decrease in price will lead to a larger percentage increase in demand). An increase in price will cause a decrease in revenue (since a slight increase in price will lead to a larger percentage reduction in quantity demanded).

If demand is price inelastic ( ε Р d<1 ), then a decrease in price will lead to a decrease in revenue. Rising prices will cause revenue growth.

In the middle of the segment 0Q we obtain a single point on the linear demand curve with unit elasticity, at which revenue is maximum and unchanged for any change in price. In this case, increasing the profitability and profitability of production is possible due to non-price factors.

Demand for a product changes under the influence of price changes in the markets for substitute and complementary goods. Quantitatively, this dependence is characterized by the coefficient of cross price elasticity of demand, which shows how the quantity of demand for a given product will change when the price of another product changes. The formula for calculating the coefficient of cross elasticity of demand for product A depending on changes in the price of product B is as follows:

Calculating the coefficient of cross price elasticity of demand allows you to answer by how many percent the quantity of demand for product A will change if the price of product B changes by one percent. Calculating the cross-elasticity coefficient makes sense primarily for substitute and complementary goods, since for weakly interrelated goods the value of the coefficient will be close to zero.

Let's remember the example of the chocolate market. Let's say we also conducted observations of the halva market (a product that is a substitute for chocolate) and the coffee market (a product that is a complement to chocolate). Prices for halva and coffee changed, and as a result, the volume of demand for chocolate changed (assuming all other factors remain unchanged).

Applying formula (6.6), we calculate the values of the coefficients of cross price elasticity of demand. For example, when the price of halva is reduced from 20 to 18 den. units demand for chocolate decreased from 40 to 35 units. The cross elasticity coefficient is:

Thus, with a decrease in the price of halva by 1%, the demand for chocolate in a given price range decreases by 1.27%, i.e. is elastic relative to the price of halva.

Similarly, we calculate the cross elasticity of demand for chocolate with respect to the price of coffee if all market parameters remain unchanged and the price of coffee decreases from 100 to 90 deniers. units:

Thus, when the price of coffee decreases by 1%, the quantity of demand for chocolate increases by 0.9%, i.e. The demand for chocolate is inelastic relative to the price of coffee. So, if the coefficient of elasticity of demand for good A with respect to the price of good B is positive, we are dealing with substitute goods, and when this coefficient is negative, goods A and B are complementary. Goods are called independent if an increase in the price of one good does not affect the amount of demand for another, i.e. when the cross elasticity coefficient is zero. These provisions are only valid for small price changes. If price changes are large, then the demand for both goods will change under the influence of the income effect. In this case, products may be incorrectly identified as complements.

Income Elasticity of Demand

The previous chapter examined the dependence of demand on consumer income. For normal goods, the higher the consumer's income, the higher the demand for the product. For lower category goods, on the contrary, the higher the income, the lower the demand. However, in both cases, the quantitative measure of the relationship between income and demand will be different. Demand may change faster, slower, or at the same rate as consumer income, or not at all for some goods. The income elasticity of demand coefficient, which shows the ratio of the relative change in the quantity of demand for a product and the relative change in consumer income, helps determine the measure of the relationship between consumer income and demand:

Accordingly, the coefficient of income elasticity of demand can be less than, greater than or equal to one in absolute value. Demand is income elastic if the quantity of demand changes to a greater extent than the quantity of income (E0/1 > 1). Demand is inelastic if the quantity demanded changes less than the quantity of income (E0/ [< 1). Если величина спроса никак не изменяется при изменении величины дохода, спрос является абсолютно неэластичным по доходу (. Ед // = 0). Спрос имеет единичную эластичность (Ео/1 =1), если величина спроса изменяется точно в такой же пропорции, что и доход. Спрос по доходу будет абсолютно эластичным (ЕО/Т - " со), если при малейшем изменении дохода величина спроса изменяется очень сильно.

In the previous chapter, the concept of the Engel curve was introduced as a graphical interpretation of the dependence of the quantity of demand on the consumer’s income. For normal goods the Engel curve has a positive slope, for goods of the lowest category it has a negative slope. The income elasticity of demand is a measure of the elasticity of the Engel curve.

The income elasticity of demand depends on the characteristics of the product. For normal goods, the income elasticity of demand is positive sign(Eо/1 > 0), for goods of the lowest category - negative sign(-Unit //< 0), для товаров первой необходимости спрос по доходу неэластичен (ЕО/Т < 1), для предметов роскоши - эластичен (Е0/1 > 1).

Let's continue our hypothetical example with the chocolate market. Let's say we observed changes in the incomes of chocolate consumers and, accordingly, changes in the demand for chocolate (we will assume all other characteristics unchanged). The observation results are listed in Table 6.3.

Let us calculate the elasticity of demand for chocolate with respect to income on the segment where the amount of income grows from 50 to 100 deniers. units, and the quantity of demand - from 1 to 5 units. chocolate:

Thus, in this segment, the demand for chocolate is income elastic, i.e. When income changes by 1%, the quantity demanded for chocolate changes by 2%. However, as income increases, the elasticity of demand for chocolate decreases from 2 to 1.15. This has a logical explanation: at first, chocolate is relatively expensive for the consumer, and as income increases, the consumer significantly increases the volume of chocolate purchases. Gradually, the consumer becomes saturated (after all, he cannot eat more than 3-5 bars of chocolate per day; among other things, it is unsafe for health), and further growth in income no longer stimulates the same growth in demand for the product. If we continued our observations, we could see that at very high incomes, the demand for chocolate becomes income inelastic (Eo/1< 1), а потом и вовсе перестает реагировать на изменение дохода (Еп/1 - " 0). Вид кривой Энгеля для этого случая представлен на Рис.6.6.

Ш Let's consider the relationship between consumer income and their demand using the example of the Republic of Belarus. Table 6.4 shows data on the cash income of households in the country in different years and information on household consumption patterns. Since price indicators fluctuated significantly due to inflation and other factors, we are interested in percentage changes in real incomes of consumers and changes in the structure of consumption.

Cross price elasticity of demand. Coefficient of cross price elasticity of demand.

ANSWER

CROSS PRICE ELASTICITY OF DEMAND expresses the relative change in the volume of demand for one good when the price of another good changes, all other things being equal.

Distinguish three Type of cross price elasticity of demand:

positive;

negative;

zero.

Positive cross price elasticity of demand refers to interchangeable goods (substitute goods). For example, butter and margarine are substitute goods; they compete in the market. An increase in the price of margarine, which makes butter cheaper relative to the new price of margarine, causes an increase in demand for butter. As a result of an increase in the demand for oil, the demand curve for it will shift to the right and its price will rise. The greater the substitutability of two goods, the greater the cross-price elasticity of demand.

Negative cross price elasticity of demand refers to complementary goods (related, complementary goods). These are goods that are shared. For example, shoes and shoe polish are complementary goods. An increase in the price of shoes causes a decrease in the demand for them, which, in turn, will reduce the demand for shoe polish. Consequently, with a negative cross elasticity of demand, as the price of one good increases, the consumption of another good decreases. The greater the complementarity of goods, the greater will be the absolute value of the negative cross price elasticity of demand.

Zero Cross price elasticity of demand refers to goods that are neither substitutable nor complementary. This type of cross price elasticity of demand shows that consumption of one good is independent of the price of another.

The values of cross price elasticity of demand can vary from “plus infinity” to “minus infinity”.

Cross price elasticity of demand is used in the implementation of antitrust policy. To prove that a particular firm is not a monopolist of a good, it must prove that the good produced by this firm has a positive cross-price elasticity of demand compared to the good of another competing firm.

An important factor determining cross-price elasticity of demand is the natural characteristics of goods and their ability to replace each other in consumption.

Knowledge of the cross price elasticity of demand can be used in planning. Let's assume that natural gas prices are expected to rise, which will inevitably increase the demand for electricity, since these products are interchangeable in heating and cooking. Assuming that the long-run cross price elasticity of demand is 0.8, then a 10% increase in the price of natural gas will lead to an 8% increase in the quantity of electricity demanded.

The coefficient of cross price elasticity of demand can be used to characterize the interchangeability and complementarity of goods only with minor price changes. Large price changes will trigger the income effect, causing demand for both goods to change. For example, if the price of bread decreases by half, then the consumption of not only bread, but also other goods will probably increase. This option may be regarded as complementary benefits, which is not legal.

According to Western sources, the elasticity coefficient of butter to margarine is 0.67. Based on this, when the price of butter changes, the consumer will react with a more significant change in the demand for margarine than in the opposite case. Consequently, knowledge of the coefficient of cross price elasticity of demand makes it possible for entrepreneurs producing interchangeable goods to more or less correctly set the volume of production of one type of good with the expected change in prices for another good.

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