Recently, you can notice a frequent change in prices for consumer goods. Often, such changes occur comprehensively. They are like a collapsing house of cards: one fall entails the following.
On the other hand, it can be noted that household incomes do not change at the same rate as prices for goods and services are rising. Of course, incomes are also growing, but their growth rate is often inferior to the price growth rate. There is a certain correlation between changes in prices for one product and demand for another. An indicator that reflects such a relationship is called cross elasticity.
Definition
If we talk about elasticity in general, then we can simplistically say that it expresses the ratio of changes in different indicators. Elasticity can be applied in the sphere of income, demand, supply. Thanks to the elasticity indicator, it can be assumed how the demand for the product will change with an increase in its price, for example, by ten percent. Or, say, income elasticity shows how demand for a particular product will change when consumer income changes.
Cross elasticity is a coefficient that reflects the relationship of the price of one product and demand for another. This indicator can be positive, negative and equal to zero. If cross elasticity has a plus sign, then we can talk about the case of matching interchangeable goods. In this case, the change in the price of one product inversely affects the change in demand for another.
Negative elasticity is characteristic of compliment goods or complementary goods. In this case, the influence is proportional to the changes, and when the price of one product increases, the level of demand for another decreases.
Zero cross-elasticity indicates that the goods are not related by any factors. In this case, a change in the level of demand or price of one product will not entail a change in any indicators of another.
Life application
Of course, the question arises: "How can a simple person without economic education apply this knowledge in his own life?" The answer is quite simple, but it’s better to explain it with an example. So, with rising oil prices, the demand for alternative energy sources increases, which increases their importance and value in the eyes of potential consumers. And subsequently, an increase in the real value of such resources is possible. Previously, no one took seriously the idea of electric vehicles, but as soon as oil prices began to rise significantly, the "powers that be" showed genuine interest in this area. In accordance with this, the value of the idea itself, as well as its derivatives, increases significantly (due to increased demand).
Cross elasticity is a very convenient tool for analyzing the market for consumer goods, but at the same time one cannot ignore the accompanying factors. So, for example, the category of luxury is almost impossible to evaluate from the position of elasticity.
