You will need

- -the initial price of good 1 (P1)
- -the final price of good 1 (P2)
- -the initial demand for product 2 (Q1)
- -the final demand for product 2 (Q2)

Instruction

1

To assess the cross elasticity you can use two methods of calculating arc and point. Point method definition of cross elasticity can be used when derived the functional relationship of dependent objects (i.e. a function of demand or supply of any goods). The arc method is used in cases when practical observations do not allow to identify the functional relationship between the we are interested in market indicators. In this situation, the estimated market reaction during the transition from one point to another (i.e. takes start and end values we are interested in the topic).

2

In order to more clearly explain the method of determining the cross elasticity (arc method), let's take a concrete problem: what is the cross

**elasticity**of goods, if the decrease in the price of margarine from 70 to 63 p., the sale of oil in the store decreased from 500 to 496 units per month?Calculate the change of volume of demand for the second product (in this case butter).∆Qₓ=(Q2-Q1)=496-500=-43

Calculate the change for the second product (in this example, margarine).∆Pᵧ=(P2-P1)=63-70=-7

4

Calculate the coefficient cross elasticity.Eշ=∆Qₓ*Pᵧ/∆Pᵧ*QₓEշ=((-4)*70)/ ((-7)*500)=0,08 (by lowering the price of margarine by 1% the demand for oil has decreased on 0,08%)

5

Analyze the obtained result. The higher the cross elasticity, the stronger the relationship of the goods. Conversely, the closer this figure is to zero, the weaker the relationships of substitution or addition. In this case, the coefficient of cross elasticity slightly greater than zero. Exploring the goods are the goods-substitutes. The drop in the price of margarine has little effect on the demand for butter. However, if you change the price of oil, the demand for margarine will change much stronger. This is because the cross -

**elasticity**can be asymmetrical, when the dependence of the products is more one-sided. For example, laptops and laptop cases. By lowering the price of laptops the demand for the cases for them will increase significantly. But with decreasing prices for computer cases, demand for the notebook computers themselves will not change.Note

Cross-elasticity is a dimensionless quantity, and this value does not depend on in any unit were measured prices, volume of sales or other parameters. It is not expressed in any units!

Useful advice

Cross-elasticity is not used for abstract calculations, but for predicting the behavior of the studied product if you change the number of conditions.

Eշ > 0 shows that the studied interchangeable products (substitutes). The increase in the price of one good leads to an increase in demand for the other.

Eշ < 0 indicates complementary goods (gin and tonic). The increase in the price of one commodity leads to a decrease in demand for the other.

Eշ = 0 independent goods vehicle ( and cocoa). The price of one product has no effect on the other.

Eշ > 0 shows that the studied interchangeable products (substitutes). The increase in the price of one good leads to an increase in demand for the other.

Eշ < 0 indicates complementary goods (gin and tonic). The increase in the price of one commodity leads to a decrease in demand for the other.

Eշ = 0 independent goods vehicle ( and cocoa). The price of one product has no effect on the other.

# Advice 2: How to find elasticity of demand at a price

Price, demand,

**elasticity**- all these concepts are part of one huge public sector market. Historically, it is the most important economic substitute. In other words, the market is the arena and the people in it players.Instruction

1

In the economy under

**the elasticity**of Yu imply the extent of reaction parameter on the change in the other. Consequently,**the elasticity of**u**demand**on*price*called the reaction**of demand**caused by the change. In other words, the price**elasticity****of demand**shows how much has changed the amount**of demand**in percentage for a particular product when its price changes by 1%.2

Demand is elastic if the change in the price of goods or services 1% the magnitude

**of demand**changes by more than 1%. Accordingly, if less than 1%, the demand is not elastic.3

As with any rule, there are some special cases. Demand may have unit

**elasticity**. In this case, if the price increases by 1% demand falls by 1%. Therefore, we can conclude that when the unit elasticity, the price change for any product or service will be accompanied by a proportional change**in the demand**for this product or service.4

There is also perfectly elastic and perfectly inelastic demand. The first case describes that whenever the established

*price*on a specific range**of the demand**consumers are willing to purchase any amount of goods. Accordingly perfectly inelastic demand shows that the volume**of demand**for the products at any*price*remains unchanged.5

In special group allocate cross -

**elasticity****of demand**. It shows how to change the value**of the demand**for this product or service with the price change of another product or service.6

To find

**the elasticity****of demand**, you should calculate the percentage change in the value**of demand**and relate it to the percentage price change. E=(Q2-Q1)/(P2-P1)*P/Q (E – coefficient of price elasticity**of demand**, Q2-Q1 is the increase in the magnitude**of demand**P2-P1 is the price increment, P – price, Q – quantity of production. This formula shows that the coefficient of elasticity depends not only on the ratio of the increments of the prices and amount of products, but of actual prices and volume.7

Coefficient of cross elasticity is different. E=(Q2-Q1)/Q*P/(P2-P1). This ratio can be greater than, less than or equal to zero. If more, then we are dealing with interchangeable products (substitutes), if less than complementary goods (complements), if equal - commodities among themselves neutral.

# Advice 3: How to determine the elasticity of demand example

Demand is the utility level of a product to consumers. To see how he would react to a price change or the average income level, it is necessary to determine the elasticity of demand. This index is calculated as a ratio and expressed in percentage.

Instruction

1

The elasticity of demand makes sense to find each time you change one of the following factors: price of product, income level of consumers. Based on the obtained value the economist can determine, positively or negatively it will affect the enterprise of profit. In accordance with this manual if necessary, adopt a decision on the introduction of corrective measures.

2

To determine the elasticity of demand, you need to have accurate information on prices and volumes of products for the beginning and end of the reporting period:

Kets = (∆q/q)/(δp/p), where KEC – the coefficient of elasticity at the price, q – quantity, p – price per unit of goods.

Kets = (∆q/q)/(δp/p), where KEC – the coefficient of elasticity at the price, q – quantity, p – price per unit of goods.

3

The same principle is calculated the coefficient of elasticity by income:

CED = (∆q/q)/(∆i/i), where I is average consumer income (from the English. income).

CED = (∆q/q)/(∆i/i), where I is average consumer income (from the English. income).

4

On the elasticity of demand is largely influenced by the prevalence and easy availability of materials for the manufacture of certain products. Inelastic goods are necessities (food, medicine, clothes, electricity). Also, these include minor budget items, such as pens, pencils, toothbrushes, matches, etc., as well as products that are difficult to replace bread, gasoline, etc.

5

The highest elasticity of demand have goods, which production requires rare, and therefore very expensive materials. Such products include jewelry products, the coefficient of elasticity which is much greater than unity.

6

Example: to determine the elasticity of demand for potatoes, if you know that the average income of consumers per year has increased from 22000 to 26000 rubles, and sales of this product increased from 110000 to 125000 kg.

Solution.

In this example, we calculate the coefficient of elasticity of demand under the income. Use the ready-made formula:

CAD = ((125000 - 110000)/125000)/((26000 - 22000)/26000) = 0,78.

Conclusion: the value of 0.78 is in the range from 0 to 1, therefore, is a product of the first necessity, the demand is inelastic.

Solution.

In this example, we calculate the coefficient of elasticity of demand under the income. Use the ready-made formula:

CAD = ((125000 - 110000)/125000)/((26000 - 22000)/26000) = 0,78.

Conclusion: the value of 0.78 is in the range from 0 to 1, therefore, is a product of the first necessity, the demand is inelastic.

7

Another example: find the elasticity of demand for fur coats with the same rate of personal income. Sales of coats increased in comparison with last year from 1000 to 1200 products.

Solution.

CAD = ((1200 - 1000)/1200)/((26000 - 22000)/26000) = 1,08.

Conclusion: QED > 1, this is a luxury item, demand is elastic.

Solution.

CAD = ((1200 - 1000)/1200)/((26000 - 22000)/26000) = 1,08.

Conclusion: QED > 1, this is a luxury item, demand is elastic.