Selling an item can increase demand and also increase demand for associated items.
The cross elasticity of demand is a microeconomic concept that measures how a change in the price of one product affects a change in the demand for another. This number is obtained by dividing the percentage change in the price of one product by the percentage change in demand for the other. The cross elasticity of demand depends on whether the products are substitutes, which are two different brands of the same product, or add-ons, which are two separate products that are related to each other, such as a video game and its individual compatible games. . Using this formula can help product manufacturers plan pricing and marketing strategies.
Elasticity in microeconomics is a way of expressing how a change in the price of a particular good will affect how much of that good consumers will demand in the market.
A typical example of cross-elasticity of demand, also known as cross-elasticity of demand and mathematically represented as CPEoD, might involve a fast-food chain raising the price of a hamburger from $4 US dollars (USD) to $4 5 dollars, which is an exchange rate of 25 percent. In the period that this occurs, a competitor chain sees the number of hamburgers it sells increase from 100 to 200, an increase of 50%. To calculate the cross-elasticity of demand in this scenario, the first hamburger chain’s percentage change in price (.25) is divided by the second chain’s percentage change in demand (.50) to achieve an OPCW of two.
When two products are substitutes, as in the previous case, the CPEoD should normally be a positive number. This is because an increase in the price of one brand’s product should lead to increased demand for a competing brand. Likewise, if one brand lowers prices, demand for a competing brand will decrease. In this case, dividing the two negatives still produces a positive number.
For products that are complementary, like the example of a video game system mentioned above and the games that are compatible with that system, the CPEoD is likely to be a negative number. If the company that manufactures the video game raises the price, it is logical that the demand for compatible games will decrease. This means that a positive number would be divided by a negative number, producing a negative result. A CPEOD result equal to or close to zero probably means that the two products in question are not related.
Industries use the cross-price elasticity of demand to implement marketing strategies and plan responses to moves by competitors. For example, a company may have to decide whether to match a competitor’s price drop. It may also have to decide whether it can meet the resulting demand if another competitor suddenly raises prices, or whether it would be more profitable to raise prices in kind. Using the cross elasticity of demand formula can help answer these questions.