What is cross-elasticity?

Recently, you can notice a frequent change in prices for consumer goods. Often such changes occur in a complex manner. They are like a collapsing house of cards: one fall entails the following.

On the other hand, you can see that the incomes of the population do not change with the same speed with which prices for goods and services are growing. Of course, incomes also increase, but the rate of their growth is often inferior to the rate of price growth. There is a certain relationship between the price change for one product and the demand for the other. The indicator that reflects this relationship is called cross elasticity.

Definition

Speaking of elasticity in general, it can be simplified to say that it expresses the ratio of changes in different indicators. Elasticity can be applied in the sphere of income, demand, supply. Due to the elasticity index, it can be assumed how the demand for a product will change with an increase in its price, for example, by ten percent. Or, say, income elasticity shows how the demand for a certain product changes when the consumer's income changes.

Cross elasticity is a coefficient that reflects the relationship between the price of one product and the demand for another. This indicator can be positive, negative and zero. If the cross elasticity has a plus sign, then we can talk about the case of comparing interchangeable goods. In this case, a change in the price of one product inversely affects the change in demand for another.

Negative elasticity is characteristic for goods compliments or complementary goods. In this case, the influence goes in proportion to the changes and when the price of one product increases, the level of demand for the other decreases.

A zero cross-elasticity index indicates that the goods are not related by any factors. In this case, a change in the level of demand or the price of one commodity does not entail a change in any indicators of the other.

Vital application

Of course, the question arises: "How can a simple person without an economic education apply this knowledge in his own life?". The answer is quite simple, but explain it better by example. Thus, as oil prices rise, demand for alternative energy sources increases , which increases their importance and value in the eyes of potential consumers. And subsequently it is possible to increase the real cost of such resources. Before, no one took seriously the idea of electric vehicles, but as soon as oil prices began to rise significantly, "the powerful of this world" showed a genuine interest in this area. In accordance with this, the cost of the idea itself, as of its derivatives, is substantially increased (in connection with the growth of demand).

Cross-elasticity is a very convenient tool for analyzing the consumer goods market, but you can not ignore the attendant factors. So, for example, the category of luxury practically can not be estimated from the position of elasticity.