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Price Elasticity Of Demand

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Price elasticity of demand is a relationship measure between the changes in the quantity of products demanded and the changes in product prices. It is used in economics in price sensitivity discussions because it indicates the responsiveness of a product’s demand on price changes in the market. The price elasticity of demand can either be elastic or inelastic depending on the changes in demand and the product cost.
It is computed by dividing the percentage changes in the quantity of products demanded by the percentage of change in the price of the products demanded. Price elasticity of demand is elastic if a small change in price is followed with a big change in the quantity of products demanded for in the market. For example, when the price …show more content…

Cross price elasticity of demand is a term used to describe the effect of changes in the price of one product on the quantity demanded of another different product. It shows the interrelatedness between the price and demand of different goods in the market. This phenomenon comes into play when dealing with products that serves as substitutes or complementary to each other.
It is computed by dividing the percentage changes in the quantity of product X demanded by the percentage of change in the price of the product Y. When the cross-price elasticity is a big positive value, it means when the price one product goes up then the demand for the other product (substitute or complement) goes up too.
When the price of the beer Dogfish goes up from $2.50 to $3.50 the demand for the beer falls from 10,000 to 6,000 bottles. This on the other hand sees the demand of Guinness increase from 8,000 to 14,000 bottles at an unchanging price of $2.70. The price of Dogfish increases by 40% (($3.50-$2.50)/$2.50*100%) while the demand for Guinness increases by 75% ((14,000-8,000)/8,000*100%) thus giving a cross-price elasticity of demand of 0.53 (40%/75%). These means that these two products are substitutes to each other since their cross price elasticity is greater than

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