Vasilyeva E.V. Economic theory Income elasticity of demand
Cross elasticity is the corresponding transformation of demand for one product subject to a decrease or increase in the cost of another product. However, other conditions remain unchanged.
Application of the indicator
The component of cross elasticity of demand is used in the implementation of antimonopoly policies of states. In practice it looks like this. A company must prove that it is not a monopoly producer or supplier of its product or service. To do this, this good must be characterized by a positive cross-elasticity of demand regarding competitors' products.
In addition, it is necessary to pay attention to the direct characteristics of the goods, as well as their ability to replace each other on the market. This factor has a significant impact on cross elasticity. It should also be noted that knowledge of the magnitude this parameter can be used for economic planning. Let's give an example. Let's assume that the price of natural gas is expected to increase. This, in turn, will inevitably lead to an increase in the demand for electrical energy, since it is an alternative and can be used for cooking and heating.
Cross elasticity of demand shows the level of substitutability of goods and services. So, for example, in a situation where a slight increase in the price of one item leads to a significant increase in demand for a second product, this indicates the proximity of goods and their ability to replace each other. But if a slight increase in the cost of a particular product stimulates a significant drop in demand for another item, this indicates that both goods are complementary.
Positive and negative values
IN this section Let's consider the varieties of the described parameter. It should be noted that the concept of positive cross elasticity of demand applies to those products that are interchangeable in the market. Such products are also called substitute goods. Let's give an example. Let's assume that the market price for margarine has increased. Butter is a competitor to this product.
Consequently, its cost relative to the price of margarine becomes less, which, in turn, entails an increase in demand. At the same time, over time, the cost of oil will gradually increase. Consequently, it can be noted that the greater the substitutability of two products, the higher the cross-price elasticity of demand. But the opposite situation is also possible.
Negative cross elasticity of demand is typical for those goods that can complement each other. Let's give an example. When the price of shoes increases, the demand for them decreases, which leads to a decrease in the demand for special creams and pastes for their care. Thus, a strong relationship can be traced - the higher the price of one related product, the lower the demand for another. In addition, the level of complementarity between two products also affects the magnitude of the negative cross elasticity of demand. The more significant the relationship between goods, the higher this indicator.
Zero cross elasticity
This type of described parameter characterizes goods as those that are neither interchangeable nor complementary to one another. This version of cross elasticity indicates that the cost of a particular product does not affect the demand for another good. In addition, it is necessary to note one more important fact. Indicators can vary from positive to negative infinity.
Cross elasticity coefficient
This index is an indicator indicating the degree of reaction of the need for a product relative to fluctuations in the cost of other products. The coefficient of cross elasticity of demand takes negative, positive or zero values. It should be noted that this component used to characterize the interchangeability and complementarity (ability to complement) of goods. At the same time, it is correct to apply the cross-elasticity coefficient only for small price fluctuations.
A given product depends not only on its own price, but also on the prices of other goods. For example, the demand for Zhiguli depends not only on the price of the Zhiguli, but also on the prices of foreign cars of a similar class, spare parts, gasoline, etc.
Cross price elasticity of demand shows by what percentage the demand for a product changes A(d a) when the price of the product changes IN(P b) by 1%.
Formula for calculating the cross elasticity coefficient:
Three cases are possible:
1. If, with an increase (decrease) in the price of a product IN demand for goods A grows (decreases), then such goods are called interchangeable(substitutes).
In this case.
For example, Coca-Cola went up in price by 10%, as a result of which the demand for it decreased, but the demand for Pepsi-Cola increased, say, by 15%. Therefore, the cross elasticity of demand for Pepsi to the price of Coca-Cola is equal to
If Coca-Cola, on the contrary, falls in price (the percentage change in price will be negative), then the demand for Pepsi will fall (the percentage change in demand will be negative). Then both the numerator and denominator will contain numbers with negative signs, but the result will still be positive.
2. If, with an increase (decrease) in the price of a product IN demand for goods A decreases (increases), then such goods are called complementary(complementary).
In this case.
For example, car parts rose in price by 10%, causing demand for cars to fall by 5%. Therefore, the cross elasticity of demand for cars with respect to the price of spare parts is equal to:
In turn, when the price of spare parts becomes cheaper, the demand for cars will increase, but the elasticity of demand for cars with respect to the price of spare parts will remain negative.
3. If, with an increase (decrease) in the price of goods B, the demand for goods A does not change, then such goods are called independent.
In this case .
Let them go up in price (get down in price) football balls. Most likely, this will not have any impact on the demand for perfume. Therefore, the price of the balls will be zero for perfume.
The demand for a product also depends on the prices of other goods.
Cross Elasticity is the elasticity of demand for one good relative to the prices of another good.
Cross elasticity of demand coefficient represents the ratio of changes in the volume of demand for a product i to the change in the price of the product that caused it y.
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 positive or negative.(Fig. 24), 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.
Figure 24 - Cross elasticity of demand
This is important for developing a general and pricing strategy for organizations, since one should take into account not only the possibility of competition (replaceable goods), but also the presence of price trends for complementary goods (for example, the housing market and the building materials, automobile market and automobile fuel market).
Substitute goods (Fig. 24a):- the cross elasticity coefficient will be a positive value and vary from 0 to ∞. This means that when the price decreases for the good y demand for the good i will change in the same direction. For example, reducing the price of a good y will cause a decrease in demand for the good i and vice versa.
Complementary benefits (Fig. 24b):- the cross plasticity coefficient will be a negative value. This means that when the price of a good changes y demand for the good i changes in the opposite direction. For example, reducing the price of a good y will cause an increase in demand for the good i, and vice versa.
Goods that are independent of each other in consumption (Fig. 24c) 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.
The practical significance of elasticity of demand is that different cases of elasticity directly affect the revenue received by the producer (TR) and the expenses of consumers.
TR = P? Q,
Where R- the price of this product,
Q- quantity of goods purchased.
Figure 25 - Relationship between elasticity and revenue
The value of elasticity of demand functions 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 (), 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). Growth will cause a reduction in revenue (since a slight increase in price will lead to a larger percentage reduction in demand).
If demand is price inelastic (), then a reduction in price will lead to a fall in revenue. Rising prices will cause revenue growth.
In the middle of the segment 0Q we obtain a single point on the demand curve with unit elasticity, at which revenue is maximum and constant for any change in price. This was due to an increase in profitability and profitability of production, possibly due to non-price factors.
29. Cross price elasticity of demand.
Cross price elasticity of demand characterizes the relative change in demand for one good (for example, X) depending on the change in the price of another good (for example, Y). The coefficient of cross elasticity of demand is calculated by the formula
E xy = (percentage change in quantity demanded for product X)/(percentage change in price for product Y) = (∆Q x /∆P y)*(P y /Q x).
The coefficient of cross elasticity of demand can have positive, negative and zero values.
Substitute goods have E xy > 0 because an increase in the price of good Y will cause an increase in the demand for good X because X replaces Y. For example, as the price of coal rises, the demand for liquid fuel or firewood increases. The higher the cross elasticity coefficient, the greater the degree of substitutability between two goods.
Complementary goods have E xy< О. Например, с повышением цены на автомобили спрос на бензин уменьшится. Чем больше отрицательная величина коэффициента перекрестной эластичности, тем больше степень взаимодополняемости товаров.
Independent goods have E xy = 0 . In this case, a change in the price of one product does not in any way affect the demand for another. For example, with an increase in the price of bread, the demand for cement will not change.
It should also be kept in mind that cross elasticity of demand may be asymmetric. It is obvious, for example, that if the price of meat decreases, then the demand for ketchup will increase; however, if the price of ketchup increases, this is unlikely to change the demand for meat.
Calculation and analysis of cross-elasticity coefficients make it possible to determine whether a product belongs to a certain type; interchangeable or complementary. In addition, the calculation of the cross-elasticity coefficient is also used to prove that a firm does not monopolize the production of any product: with a positive cross-elasticity coefficient E xy, in the event of an increase in the price of a given company’s products, the demand for interchangeable products of another company increases.
30. Income elasticity of demand.
Income Elasticity of Demand This coefficient shows by what percentage the demand for products will change when the buyer’s income changes by 1%, and is calculated by the formula:
Where 
– average value volume of demand for the product; 
– average consumer income;Δ I– change in income equal to I 2
–
I 1 ;I 1 – initial amount of income; I 2 – final amount of income.
Diff. several formselastic demand by income :
1.
Positive(
> 0), relating to normal goods (highest quality goods). As income increases, the demand for such goods also increases.
2.
Negative(
<
0), относящаяся к товарам низшего качества.
При увеличении доходов, спрос на такой
товар падает.
3.
Zero(
= 0), at which the volume of demand is insensitive to changes in income.
In practice, the meaning of the income elasticity of demand coefficient is as follows. With its help, the prospects for the development of industries are predicted: developing, stable, or in a state of stagnation, and dying. The higher the relative income elasticity of demand in an industry, the more actively this industry develops. The growth of a positive value of the coefficient Ei at a rate approximately equal to the rate of production growth indicates stability in the industry, and the lack of growth indicates stagnation. Finally, a negative coefficient is a sign of a reduction in production. Using the income elasticity of demand coefficient to classify enterprises, their groups or industries depending on development trends makes it possible to timely identify critical areas and carry out their reorganization.
A change in the price of a product does not always cause the same market reaction. After an increase in price, people stop buying one product almost completely. The other is being actively purchased, despite rising prices and declining income.
Types of elasticity
Depending on what factor caused the decrease or increase in demand for products, they distinguish different types the phenomenon under consideration.
Price elasticity of demand occurs when the reaction of buyers is associated with changes in the cost of goods. If the latter has increased, then this leads to two possible results. Either consumers buy less of the product or buy the same quantity of it as before. In the first case, demand is said to be elastic, but in the second, it is not.
Another type of this indicator depends on the availability of money from consumers. Income elasticity of demand shows whether a buyer will purchase a particular product at a lower or lower price. large quantities, if the level of his income decreases or increases.
Finally, it happens that the price of one product changes, and a decrease or increase in demand affects another product. Cross elasticity of demand characterizes the degree of precisely such changes.
Income elasticity of demand coefficient
Elasticity coefficients show the magnitude of the change in demand when income or prices decrease or increase. For calculation price elasticity demand needs to be determined percentage changes in the volume of demand to changes in income.
The connection is not always clear-cut. It depends not only on the cost, but also on the product category. Essential goods will have zero income elasticity. Both poor and rich buy bread and pay for utilities.
If the product belongs to a low quality category, then the income elasticity will be negative meaning. The richer the household, the less it buys cheap and low-quality products.
The demand for so-called normal goods (of which the majority) has a positive coefficient. As income increases, people increase their consumption of these goods.
Price elasticity coefficient
This coefficient is determined by calculating the ratio of the change in volume of demand to the change in price. The result is expressed as a percentage.
Elasticity is considered high if even a small increase in price reduces demand. It can have a value of one if a 1% change in cost causes a 1% shift in sales results. If demand remains almost unchanged despite a significant rise or fall in prices, then this is inelastic demand.
Demand can be either completely inelastic or perfectly elastic. In the first case, consumption does not change at all, no matter what happens to the price. For example, vital medications are purchased in the same quantity, even if their cost increases significantly. In the second case, everything is the other way around.
Cross elasticity coefficient
The coefficient of cross elasticity of demand for a product is the ratio of the percentage change in demand for the first product to the percentage change in demand for another product.
The coefficient of cross elasticity of demand can have a “plus” or “minus” sign. It depends on how the products are related to each other. If they are interchangeable, then the coefficient will be positive. For example, butter can be replaced with margarine, pork with beef, White bread- black, coal - firewood, etc. The higher the coefficient, the more opportunities there are to find analogues among the products being studied. For example, if butter goes up in price, the demand for margarine will increase.
The coefficient of cross elasticity of demand will take a negative value in the case of complementary things. For example, if we're talking about about cars and gasoline, meat and ketchup, etc. An increase in the cost of a car will lead to a fall in demand for fuel. After all, if consumers buy cars less often, then they will need gas station services less.
Asymmetric cross elasticity
A borderline case is possible when the indicator is zero. This happens if the goods are independent of each other, and a change in the value of one of them does not in any way affect the level of demand for the other. Cement sales have nothing to do with rising bread prices. There is no relationship between the fall in the price of butter and the demand for bed linen.
It should be remembered that the cross elasticity of demand for a product can be asymmetric. That is, the pattern does not necessarily work in both directions. Lower meat prices could boost ketchup sales. But hardly a reduction in price tomato sauce stimulates the consumption of pork or beef.
Why do we need cross elasticity coefficients?
These indicators make it possible to find out what type of product the product belongs to (interchangeable or complementary). In practice, this is not as easy to do as it seems.
Everything is relatively simple when there is a general decline in the material well-being of the population, for example, during a crisis. The overall purchasing activity of consumers will fall, and this will be the income elasticity of demand. Cross elasticities reveal less obvious relationships. For example, when comparing a product and a service.
Let’s say, when the price goes up new shoes repair services are becoming more in demand. What if it's the other way around? Will consumers buy more new shoes if repairing old ones becomes more expensive?
Also, cross elasticity of demand shows how much a particular firm monopolizes an industry. If, when this company increases prices, consumers switch to similar products from other organizations, then the first company can no longer be called a monopolist.
Cross Elasticity and Pricing
Indicators are important not only for analyzing possible changes in demand if similar products from other companies are available on the market. Competition can occur between goods produced by the same enterprise.
Large companies often offer a large selection of interchangeable (several types of soap, powder, bread, etc.) or complementary (shampoo and conditioner, razors and blades, vacuum cleaners and replacement filters) products. The study of cross elasticity helps in developing pricing strategies to maximize profits overall.
Cross Elasticity in Determining Industry Boundaries
Cross elasticity of demand can show the boundaries of industries. True, with some reservations.
So, if the coefficient of this elasticity is high, then we can say that the goods under study belong to the same industry. If the cross elasticity of a product is low relative to all other products, then it forms a separate industry.
This method of determining the boundaries between spheres has disadvantages. For example, it is difficult to know what the level of cross elasticity should be. For example, different types of frozen vegetable mixtures can easily replace each other. But this does not mean that the consumer is ready to buy chilled vegetables instead of frozen dumplings, although both products are frozen products. Whether the production of such dumplings and vegetables should be considered one industry or two is unclear.
Elasticity factors
The elasticity of demand depends not only on prices and income, but also on other factors.
Firstly, it is important whether the product has analogues. The more substitutes there are, the more elastic the demand. If a certain brand of clothing becomes more expensive, the consumer can easily switch to another brand. That is, the cross elasticity of demand will be high.
It’s another matter if the price of a vital medicine increases. A person who has diabetes will always buy insulin because the medicine is necessary and irreplaceable.
Secondly, there is a difference between essential goods and luxury goods. If a family has always eaten a loaf of bread every day, then it is unlikely that its rise in price will change anything. The household will continue to buy one loaf of bread every day. The same goes for salt, sugar, soap, matches, etc. If the price soars jewelry, without which it is quite possible to live, then the consumer will save on them.
Thirdly, the share of expenses on goods in general structure spend For example, less money is spent on bread than on buying a car. Therefore, if all prices rise, people would rather refuse to buy a car than buy bread.
Finally, how much time households have to make a decision is important. It is not always possible to quickly find a replacement product, so in the short term demand will be less elastic. Gradually, consumers adapt, finding analogues or learning to do without this or that product, so the variability of demand in the long run is higher.
Now we know what cross elasticity of demand is and why it is needed.
