First, the elasticity coefficient is a pure number, meaning that it does not have units of measurement associated with it. There are a few other important points to note about the coefficient value provided by this formula. Sale: There is an inverse relationship between price and quantity demanded, so the elasticity coefficient is almost always negative. This number is likely to be reported simply as 1.
For example, if the price of a good increases by 5 percent and the quantity demanded decreases by 5 percent, then the elasticity at the initial price and quantity is -5%/5% = -1. However, economists often disregard the negative sign and report the elasticity as an absolute value. The formula above usually yields a negative value because of the inverse relationship between price and quantity demanded. The formula for calculating both XED and YED is essentially the same as that for calculating the price elasticity of demand. The PES for manufactured products is relatively high because it is easier to increase or decrease quantity supplied in response to a change in price.\]
The PES for primary commodities is relatively low because a change in price cannot lead to a proportionately large increase in quantity supplied. Cross Elasticity of Demand (XED) XED measures the responsiveness of demand of one good to a change in the price of another good. This means demand changes proportionately more than price. Shorter length of production period, more elastic Note that this time the value of PED is greater than -1. More ease in storing goods, more elasticĪ. Ease and speed firms can shift resources from one industry to anotherĪ. Quicker resources can be shifted, more elasticī. What are the formulae for PED and YED To calculate PED, we use the following formula: PED percentage change in quantity demanded/percentage change in price. Take time to change quantity supplied (react to price changes)Ī.
PED YED XED FORMULA SERIES
The measure of how a change in the overall income level in an economy changes in the demand of a specific product.Ĭ. Superbly structured, colourful and engaging series of Worksheets / Work Booklets, along with Revision Notes. package complementary goods together, display same area, stock up goods) Partner with such firms and link marketing plans to the pricing policy of the other firm. If a firm has a product that has a negative CED in relation to his rival’s product, the firm His product to increase product differentiation. The pricing policies of the rival firms, through advertising and adding different features to Respond quickly to change in the price of the rival’s product.įirms can make their goods less substitutable from its rivals so that it is less affected by Has a product that has a high positive CED in relation to his rival’s product, the firm has to What are the implications of XED for business if prices of complements/substitutes change?ĬED helps to increase the rival consciousness of a firm and plan pricing policies. Thus if a small change in price increases/decrease the sales of another product by a significant amount, the absolute value of XED would be high.
PED YED XED FORMULA PS3
Why does the absolute value of XED depend on the closeness of the relationship between two goods?Īssuming Xboxs and PS3s are close substitute goods.Ībsolute value of XED depends on the closeness of the relationship between two goods because if the price of Xbox rises a bit, everyone would switch over to the PS3 and the sales of PS3 may skyrocket.
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