When the Cross Elasticity between x and y is greater than zero the goods are?

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What is Cross Elasticity of Demand?

Cross elasticity of demand refers to an economic concept that usually measures the responsiveness in the demanded quantity of one good when the price of another product changes. Also referred to as the cross-price elasticity of demand, the measurement is calculated by taking the percentage difference in the demanded quantity of one good and then diving it by the percentage difference in the price of another product.

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How is Cross Elasticity of Demand Used?

Cross elasticity on demand also measures the sensitivity of the demand for a product or service to the variation of the price of a different good or service. As such, the subject seeks to determine how much the consumption of product changes when the value and cost of a different product also changes. For instance, how much increase in the price of vehicles there is when the price of gasoline declines. Or better yet, how much the decrease in the purchase of printers there will be if the price of the printer tub goes up. The cross elasticity of demand can be calculated with any products or services. Below, you'll learn more about how the relationship between the products impacts whether they are substitutes, complementariness, or independent.

Calculation of cross elasticity

To calculate the cross elasticity, it was evaluated in the following way: X, Y = Percentage Variation of the quantity demand of X/Percentage variation of the price of product Y. In arithmetic terms, the following formula will be used: Where: Qx = amount of x Qy = amount of y Px = price of x Py = price of y = variation

Substitute Goods

When the cross-elasticity of demand is positive, the product, Y, is substituted for X. In this case, before experiencing an increase in price Y, the quantity demand of X will increase. The above illustration implies that consumers can be a great substitute such that when the price of product Y increases, they reduce the purchasing power of Y to replace them to a more significant purchase amount of X.

Example

Let us look at this example closely: butter can substitute margarine. This is at least for many people. In this instance, if the price of butter goes up, the amount of margarine demanded is expected to increase as well.

Complementary Goods

When the cross-elasticity is negative, the products, as well as services, are complementary. This implies that they are consumed together- for instance, bread and butter. Because most individuals like to consume the products, they will reduce the purchase of these items thereby reducing the purchase of bread.

Independent goods

When the cross elasticity is zero, the goods, as well as services, are interconnected and independent. That implies that buyers don't consider these goods as substitutes or complements. Therefore, their demands are independent. Check out this example. Shoes and milk are goods that satisfy entirely different needs. There's no expected reaction in the industry of shoes prior to a variation in the milk industry.

If you are learning to play ping pong and you buy new rackets to play, how many ping pong balls would you purchase? These two products are often bought together, which is something economists refer to as complementary goods. The exact answer will differ from person to person not only because their cross-price elasticities of demand are different, but also because their preferences are different, and their consumption decisions react to price changes differently. Eager to learn more? Then read on.

Note that the price elasticity of demand measures the responsiveness of the demanded quantity of one good to the changes in the price of that same good. In contrast, cross-price elasticity of demand measures the responsiveness of the demanded quantity of one good to changes in the price of another good, such as a substitute or a complement.

Imagine two closely related goods such as apples and pears. These goods are usually suitable for interchangeable consumption. Most people would not mind substituting one fruit for another. Now, imagine that the price of pears goes up. Since consumers are likely to prefer both fruits equally, they would shift their consumption towards apples as apples are now cheaper. The proportionate response of the quantity demanded of apples to a proportionate change in the price of pears is what the cross elasticity of demand measures.

Types of cross elasticity of demand

The value of the cross elasticity of demand will depend on whether the two goods are substitutes, complements, or goods with no apparent relationship.

Cross elasticity of demand and substitutes

Substitute goods are goods that consumers consider to be identical or similar enough for interchangeable consumption.

The demanded quantity of any two substitutes goes in opposite directions. In other words, the less a person consumes one good, the more they would consume this good’s substitute. The cross-price elasticity of demand is a useful measure that allows us seeing how the consumer quantity demanded of one product will respond to price changes of another product. Businesses use cross elasticity of demand to determine how strong their product brand image is. The businesses increase the price of their products by a small margin, and if the demand shifts significantly towards competitors’ products, it is a sign that they need to work on brand loyalty. The firms will then invest more in customer loyalty programmes, packaging, and advertising to increase brand loyalty.

When the cross elasticity between X and Y is greater than zero then the goods are?

When the cross price elasticity of demand is greater than zero the goods are complements?

When the cross elasticity of demand between two goods is zero?

When the cross price elasticity is less than zero then the goods are considered as?