Cross elasticity of demand between petrol and car is
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Definition
According to Ferguson 'cross elasticity of demand is proportional change in the quantity of x demanded resulting from a given relative change in the price of relative good y'.
Formula:
The formula for measurement of cross elasticity of demand is as follows:
Ecr = Proportionate change in demand for x / Proportionate change in the prices of y
For example when price of tea increases from $10 to $15 per kilogram and as a result demand for coffee increases from 20 tones to 30 tones per month price of coffee remaining constant. If we put values in the formula the result is: Δq ÷ Δp × p ÷ q
In the example; Δq = 30 - 20 =10; q = 20; Δp = 15 - 10 = 5; p = 10
Putting the values in the question the result is; Ecr = 10 ÷ 5 ×10 ÷ 20 = 1
The same formula is used to measure cross-elasticity of demand for a commodity in response to change in the price of its complementary goods. The example of complementary goods is petrol to car. When the price of car increases there is decrease in the demand for petrol.
According to Ferguson 'cross elasticity of demand is proportional change in the quantity of x demanded resulting from a given relative change in the price of relative good y'.
Formula:
The formula for measurement of cross elasticity of demand is as follows:
Ecr = Proportionate change in demand for x / Proportionate change in the prices of y
For example when price of tea increases from $10 to $15 per kilogram and as a result demand for coffee increases from 20 tones to 30 tones per month price of coffee remaining constant. If we put values in the formula the result is: Δq ÷ Δp × p ÷ q
In the example; Δq = 30 - 20 =10; q = 20; Δp = 15 - 10 = 5; p = 10
Putting the values in the question the result is; Ecr = 10 ÷ 5 ×10 ÷ 20 = 1
The same formula is used to measure cross-elasticity of demand for a commodity in response to change in the price of its complementary goods. The example of complementary goods is petrol to car. When the price of car increases there is decrease in the demand for petrol.
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