Cross Elasticity of Demand, Economics Video Lecture | Business Economics for CA Foundation

Ans. Cross elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good. It shows the relationship between the changes in the demand for one good and the changes in the price of another good. If the cross elasticity of demand is positive, it means the two goods are substitutes, and if it is negative, they are complements.

Ans. The cross elasticity of demand is calculated by dividing the percentage change in the quantity demanded of one good by the percentage change in the price of another good. The formula for cross elasticity of demand is: Cross Elasticity of Demand = (Percentage Change in Quantity Demanded of Good A) / (Percentage Change in Price of Good B) The result will be either positive or negative, indicating the relationship between the two goods.

Ans. A positive cross elasticity of demand indicates that the two goods are substitutes. This means that an increase in the price of one good will lead to an increase in the demand for the other good, as consumers switch from the more expensive good to the relatively cheaper substitute. On the other hand, a decrease in the price of one good will lead to a decrease in the demand for the other good.

Ans. A negative cross elasticity of demand indicates that the two goods are complements. This means that an increase in the price of one good will lead to a decrease in the demand for the other good, as they are typically consumed together. Conversely, a decrease in the price of one good will lead to an increase in the demand for the other good.

Ans. Cross elasticity of demand provides valuable information to businesses regarding the relationship between their products and other substitute or complementary goods in the market. By understanding the cross elasticity of demand, businesses can make informed decisions regarding pricing, marketing strategies, and product development. For example, if a business knows that their product has a high positive cross elasticity with a competitor's product, they can adjust their pricing or marketing efforts to attract customers who are looking for a substitute. Similarly, if a business knows that their product has a high negative cross elasticity with another product, they can focus on bundling or promoting the two products together to increase sales.