Cross elasticity is the corresponding transformation of demand indicators for one product, subject to a decrease or increase in the value of another product. However, other conditions remain unchanged.
Indicator application
The component of cross-elasticity of demand is used in the implementation of antitrust policies of states. In practice, this is as follows. A company needs to prove that it is not a monopoly producer or supplier of its goods or services. To do this, this benefit should be characterized by a positive cross elasticity of demand regarding competitors' products.
In addition, it is necessary to pay attention to the immediate characteristics of the goods, as well as their ability to replace each other in the market. This factor has a significant effect on cross elasticity. It should also be noted that knowledge of the value of this parameter can be used for economic planning. We give an example. Suppose an increase in the cost of natural gas is expected. This, in turn, will inevitably lead to an increase in demand for electric energy, since it is an alternative and can be used for cooking and heating rooms.
Cross elasticity of demand shows the level of interchangeability of goods and services. So, for example, in a situation where a slight appreciation of one position leads to a significant increase in demand for a second product, this indicates the proximity of goods and their ability to replace each other. But if a slight increase in the cost of a particular product stimulates a significant drop in demand for another position, this indicates that both benefits are complementary.
Positive and negative values
In this section, we consider varieties of the described parameter. It should be noted that the concept of positive cross elasticity of demand holds true for those products that are interchangeable in the market. Such products are also called substitute goods. We give an example. Suppose the market price for margarine has risen. Butter is a competitor to this product.
Consequently, its value relative to the price of margarine becomes less, which, in turn, entails an increase in demand. At the same time, over time, the cost of oil will gradually increase. Therefore, it can be noted that the greater the interchangeability of the two products, the higher the cross-elasticity of demand at a higher price. But the opposite is also possible.
Negative cross elasticity of demand is characteristic of those goods that are able to complement each other. We give an example. With an increase in the price of shoes, demand for it decreases, which leads to a decrease in demand for special creams and pastes for caring for it. Thus, a persistent relationship can be traced - the higher the price of one related product, the lower the demand for another. In addition, the level of mutual complementarity of the two products also affects the magnitude of the negative cross elasticity of demand. The more significant the relationship between goods, the higher this indicator.
Zero Cross Elasticity
This variety of the described parameter characterizes the goods as those that are neither interchangeable nor complementary to one another.This option of cross elasticity indicates that the cost of a particular product does not affect the demand for other goods. In addition, another important fact should be noted. Indicators can range from positive to negative infinity.
Coefficient of cross elasticity
This index is an indicator indicating the degree of reaction of the need for a product relative to fluctuations in the cost of other products. The coefficient of cross elasticity of demand takes negative, positive or zero values. It should be noted that this component is used to characterize the interchangeability and complementarity (ability to complement) of goods. In this case, the coefficient of cross elasticity is correctly applied only with small price fluctuations.