Definition of cross elasticity of demand
Cross elasticity of demand shows the degree of dependence of the demand for a good or service (A) on the price of another good or service (B). See also the the price elasticity of demand.
Cross elasticity of demand (eng. Cross elasticity of demand) measures the percentage change in the quantity of a product or service purchased in response to a price change in another product or service.
Cross elasticity of demand — Wikipedia
If the goods appear to the buyer to be interchangeable or, as they are also called, substitutes (Substitute products), an increase in the price of product B will increase sales of product A. For example, increasing the price of beef (B) will cause the demand for poultry (A)In this case, the cross-elasticity of demand will be positive (EAB > 0).
If the buyer regards the products as complementary (see Complementary products), an increase in the price of product B will not only reduce its demand, but also reduce the demand for product A. For example, an increase in the price of mobile phones (B) will reduce their demand, and the number of sales of covers for them (A) will decrease. In this case, the cross-elasticity of demand will be negative (EAB < 0).
If a change in the price of one good (A) has no effect on the demand for another good (B), then the goods are independent. For example, increasing the price of beef will not affect the number of telephone covers sold. This means that the elasticity of demand is zero (EAB = 0).
The coefficient of cross price elasticity of demand
The coefficient of cross price elasticity of demand is calculated by dividing the percentage change in demand for product A by the percentage change in the price of product B.
EAB=∆QA/QA÷∆PB/PB
QA – Number of sales of the product A;
PB - The price of the product B;
The coefficient of cross-price elasticity of demand (EAB) is used to determine whether the products concerned are interchangeable interchangeable or complementary. This allows you to choose the right product pricing strategy.
Where is the cross-elasticity of demand used?
The cross-elasticity of demand can be used to determine the optimal price for a product. For example, if the price of product A increases, the manufacturer can use the cross-elasticity of demand to determine how much the demand for product B will increase relative to product A. A seller can also use the cross-elasticity of demand to determine how much the demand for a good will change if the price of that good goes up. This helps the manufacturer and seller to determine the optimal price for the product to achieve maximum profit.
To determine the the optimal price of a product using of cross elasticity of demand it is necessary to carry out market research, analyse the prices of other products and make an assumption about how a change in the price of one product will affect the demand for other products. This will help determine the optimal price for the product to achieve maximum profit.
ShopService.pro offers monitoring, analysis and comparison of prices of suppliers' goods.
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You can also predict how demand for a product will change if the price changes, using mathematical models and data analysis.
To create a table of competitor product prices ShopService.pro suggests the use the use of open source data collection (Scraping).
