The demand and supply of various goods are not equally sensitive to changes in the factors that determine them. Elasticity in the economy is determined by the degree of this sensitivity. There are 2 types of such "flexibility": on demand and on offer. Today we’ll talk about the first category. But before talking about what is the cross elasticity of demand, we should consider its basis as such.
The elasticity of demand in the price category is the strength of the demand reaction to how the price changes. It shows how demand fluctuates at an unstable cost of the product. If you look more closely, this is an indicator of the change in percentage.
Options for elasticity of demand in the price category:
1) elastic - if a slight decrease in price positively affects sales;
2) inelastic - if a significant change in price does not particularly affect the sales volume ;
3) single elasticity - if a one percent change in price causes the same change in sales.
It is known that demand is influenced not only by price, but also by other factors. For example, consumer income. Consider this kind of flexibility.
The elasticity of demand from income is the reaction force of demand for any product, which leads to an increase or decrease in consumer income. It shows how demand will change with an increase or decrease in customer income.
Options for flexibility of demand from income are similar to the previous ones.
Cross elasticity of demand is the strength of the reaction of demand for a product to a change in the value of another product. It shows how much the demand for one product will change with an increase or decrease in the price of another.
Cross elasticity of demand can be:
1) positive - when the studied products are interchangeable (for example, cakes and sweets, shampoos and soap, coffee and tea);
2) negative - when an increase in the price of one product will negatively affect the demand for another product, that is, the products under study are mutually complementary (for example, gasoline and a car, film and camera, tickets and travel packages);
3) zero or close to zero - when the change in the price of one product does not (or very slightly) affect the demand for another product, that is, the goods are neutral or independent (for example, shoes and hats, plates and pans).
Factors of change in demand.
1) The greater the limited access to the product, the less elasticity of demand for it.
2) The more substitutes a product has, the higher the cross elasticity of demand becomes.
3) Demand becomes more elastic over time (that is, if the cost of a product has changed dramatically, then demand cannot also change dramatically, because consumers will need time to convert needs).
Depending on the market side, it can be divided into 2 hemispheres. In the consumer market, manufacturers compete who try to best satisfy the needs of consumers. And in the manufacturer’s market, consumers compete for the possession of the product that best meets their needs.