What is the cross elasticity of demand?
Cross elasticity of demand is a microeconomic concept that measures how to change the price in one product affects the change in the demand of another. This number is achieved by distributing percentage change in one product for a percentage change in demand for a second. The cross elasticity of demand depends on whether the products are substitutes, which are two different brands of the same product or accessories, which are two separate products that relate to each other, such as the video game system and its compatible individual games. The use of this formula can help product manufacturers to devise price and marketing strategies. In the time period when this happens, competing Chav sees that the amount of burgers it sells increases from 100 to 200, for an increase of 50 percent. To calculate the cross elasticity of demand in this scenario, the percentage of price change for the first hamburger chain (0.25) is divided into a percentage of demand changes for the second chain (0.50) to reach Cpeod 2.
When two products are substitutes, as in the above case, Cpeod should usually prove to be a positive number. This is because the increase in the price of one product brand should lead to higher demand for a competitive brand. For the same reason, if one brand reduces prices, the demand for the competitive brand will fall. In this case, the division of both negatives still creates a positive number.
In the case of products that are supplements, such as the example listed previously in the video game system and games compatible with this system, CPEOD will most likely be a negative number. If a company that creates a video game system increases the price, the demand for compatible games would drop. This means that the positive number would be divided into a negative number that causes a negative result. The result of cpeod at zero or near it means that these two products are not related.
Industrial sectors use the cross price of demandY to implement marketing strategies and planning reactions to competitors' movements. For example, one company might decide whether it corresponds to a decrease in the price of a competitor. It may also have to decide whether it can satisfy the resulting demand if another competitor at once increases prices or would be more advantageous to raise prices in the native. Using the Cross Elasticity of the Demand formula can help answer these questions.