Cross Elasticity of Perfect Substitutes

Definition
Cross elasticity of perfect substitutes refers to the measure of responsiveness of the demand of one product to the increase or decrease in the price of another product that can be used as a perfect substitute. In simple terms, it is a measure of how much the demand for one product changes when the price of another product, which is a perfect substitute, changes.

Characteristics
The following are the characteristics of cross elasticity of perfect substitutes:

• Perfect substitutes are products that can be used interchangeably. Therefore, consumers do not have any preference for one product over the other.


• The cross elasticity of perfect substitutes is infinite. This means that the demand for one product will change infinitely for any change in the price of the other product.

Formula
The formula for calculating cross elasticity of perfect substitutes is as follows:

Cross Elasticity of Perfect Substitutes = (% Change in Quantity Demanded of Product A)/(% Change in Price of Product B)

Example
For instance, if the price of Coke increases by 10% and the demand for Pepsi increases by 10%, then the cross elasticity of perfect substitutes between Coke and Pepsi is infinite.

Importance
Cross elasticity of perfect substitutes helps firms to understand the competitive dynamics of the market. The higher the cross elasticity of perfect substitutes, the more competitive the market is, and the more likely it is that firms will engage in price wars to gain market share. Additionally, firms can use cross elasticity of perfect substitutes to determine the optimal price of their products. If a firm increases the price of its product, and the cross elasticity of its competitor's perfect substitute is infinite, then the firm is likely to lose market share.

Conclusion
In conclusion, cross elasticity of perfect substitutes is a measure of responsiveness of the demand for one product to the change in price of another product that is a perfect substitute. The cross elasticity of perfect substitutes is infinite, and it helps firms to understand the competitive dynamics of the market.

Direct and postive ans can be infinite