What is the cross-elasticity?

Recently, you may notice frequent changes in prices for consumer goods.Often these changes are taking place in a complex.They are like the tottering house of cards: one drop entails the following.

On the other hand, we can see that incomes do not change at the same rate at which rising prices for goods and services.Of course, incomes are rising, but the pace of growth is often inferior to the growth rate of prices.There is a definite correlation of price changes on demand for one product and another.The index, which reflects this relationship is called the cross-elasticity.

Determination

If we talk about flexibility in general, it can be simplistic to say that it expresses the attitude changes of different indicators.Flexibility can be applied in the field of income, demand, supply.Due to the elasticity can be assumed as a change in product demand for increase of its price, for example, ten percent.Or, say, income elasticity shows how to change the demand for a certain product a change in consumer income.

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Cross elasticity - a ratio that reflects the relationship of the price of goods and the demand for the other.This figure can be positive, negative and zero.If the cross-elasticity is positive, then we can speak about the case of matching interchangeable commodities.In this case, one commodity price change inversely affect the change in demand for the other.

negative elasticity characteristic of the goods, compliments or complementary goods.In this case, the effect is proportional to the change and with increasing prices for one product to another level of demand reduced.

zero cross-elasticity index indicates that the goods are not linked by any factors.In this case, changes in the level of demand or the price of one product will not entail a change of any other indicators.

Life application

Of course, the question arises: "How simple man without economic education to apply this knowledge in your own life?".The answer is quite simple, but it is better to explain with an example.Thus, an increase in oil prices increases the demand for alternative energy sources, which increases their importance and value in the eyes of potential customers.And then it may increase the real value of these resources.Previously, no one took seriously the idea of ​​electric cars, but once oil prices began to rise significantly, "the powers that be" have shown a genuine interest in this area.Accordingly, the value of the idea, as well as its derivatives, is substantially increased (due to the increase in demand).

Cross elasticity is a very useful tool for the analysis of the consumer market, but it can not ignore the contributing factors.For example, the category of luxury virtually impossible to estimate the position of elasticity.