Monday  August 12, 2024
 AmosWEB means Economics with a Touch of Whimsy!
 HERFINDAHL-HIRSHMAN INDEX: A measure of concentration of the production in an industry that's calculated as the sum of the squares of market shares for each firm. This is an alternative method of summarizing the degree to which an industry is oligopolistic and the relative concentration of market power held by the largest firms in the industry. The Herfindahl index gives a better indication of the relative market control of the largest firms than can be found with the four-firm and eight-firm concentration ratios.

CROSS ELASTICITY OF DEMAND:

The relative response of a change in the demand for one good to a change in the price of another good. More specifically the cross elasticity of demand is percentage change in the demand for one good due to a percentage change in the price of another good. This notion of elasticity captures the other prices demand determinant. Three other notable elasticities are the price elasticity of demand, the price elasticity of supply, and the income elasticity of demand.
The cross elasticity of demand quantifies the theoretical relationship between the price of one good and the demand for another good as identified by the other prices demand determinant. A positive cross elasticity indicates a substitute good and a negative cross elasticity exists for a complement good.

Suppose, for example, that the price of a pecan pie increases by 10 percent (say \$1.00 to \$1.10 per slice). This increase in price is likely to cause the demand of hot fudge sundaes to change. The cross elasticity of demand answers the question: Does demand increase or decrease, and if so, by how much? If the demand increases by 10 percent (say from 100 hot fudge sundaes to 110 hot fudge sundaes), then pecan pie is a substitute good for hot fudge sundaes. If the demand decreases by 10 percent (say from 100 hot fudge sundaes to 90 hot fudge sundaes), then pecan pie is a complement good for hot fudge sundaes. If the demand does not change, then pecan pie is an independent good relative to hot fudge sundaes.

### A Summary Formula

The cross elasticity of demand is often summarized by this handy formula:
 cross elasticityof demand = percentage changein demand for good 1percentage changein price of good 2
In theory, the cross elasticity of demand is specified in terms of the "percentage change in demand." The reason is that other prices affect demand not quantity demanded.

However, in practice, the cross elasticity of demand is calculated as the percentage change in "quantity" resulting from the percentage change the price of another good. In other words, the calculation is based on the change in quantity from one value to another.

### Substitute and Complement

AlternativeCoefficient (C)
Substitute GoodC > 0
Complement GoodC < 0
Independent GoodC = 0
Other prices affect the demand for a good in one of three ways. An increase in the price of another good causes an increase in demand, a decrease in demand, or no change in demand. The result is either a substitute good, a complement good, or an independent good.
• Substitute Good: A substitute good exists if an increase in the price of one good causes an increase in demand for the other good. This is seen as a positive value for the cross elasticity of demand, or a coefficient of elasticity of C > 0.

• Complement Good: A complement good exists if an increase in the price of one good causes a decrease in demand for the other good. This is seen as a negative value for the cross elasticity of demand, or a coefficient of elasticity of C < 0.

• Independent Good: An independent good exists if a change in the price of one good has no affect on the demand for another good. This is seen as a zero value for the cross elasticity of demand, or a coefficient of elasticity of C = 0.

Although some goods might intuitively appear to be substitute, complement, or independent goods, economists generally let cross elasticity calculations make the actual determination. One of the more important applications of these calculations is in the area of market control',500,400)">market control and antitrust laws. Because government frowns on markets controlled by a single firm, it is very important to know if the buyers of the good produced by one firm have any reasonable substitute alternatives. If there are NO close substitutes, that is, all cross elasticities are approximately zero, then the firm producing the good probably falls into the monopoly category of market structures and is subject to antitrust scrutiny.

### Three Other Elasticities

The cross elasticity of demand is one of four common elasticities used in the analysis of the market. The other three are price elasticity of demand, price elasticity of supply, and income elasticity of demand.
• Price Elasticity of Demand: On one side of the market is the price elasticity of demand. This is the relative response of quantity demanded to changes in the price. It is specified as the percentage change in quantity demanded to a percentage change in price.

• Price Elasticity of Supply: On the other side of the market is the price elasticity of supply. This is the relative response of quantity supplied to changes in the price. It is also analogously specified as the percentage change in quantity supplied to a percentage change in price.

• Income Elasticity of Demand: This is the relative response of demand to changes in income, or the percentage change in demand due to a percentage change in income. This elasticity quantifies the buyers' income demand determinant.

 <= CREDIT UNIONS CURRENCY =>

Recommended Citation:

CROSS ELASTICITY OF DEMAND, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: August 12, 2024].

Check Out These Related Terms...

Or For A Little Background...

And For Further Study...

Related Websites (Will Open in New Window)...
Search Again?

 BLACK DISMALAPOD[What's This?] Today, you are likely to spend a great deal of time searching for rummage sales hoping to buy either decorative picture frames or storage boxes for your income tax returns. Be on the lookout for cardboard boxes.Your Complete Scope
 Al Capone's business card said he was a used furniture dealer.
 "When one door closes another door opens; but we do often look so long and so regretfully upon the closed door, that we do not see the ones which open for us. "-- Alexander Graham Bell, inventor
 SMAStructural Moving Average
 Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

| | | | | | | | | | |
| | | |

Thanks for visiting AmosWEB