Cross elasticity

The concept of cross elasticity is also equally important in business decision making.It is important for the firm to be aware of how the demand for its product is likely to respond to change in price of other goods.This information is necessary for formulating firm's own pricing strategy and for analysing the risk associated with various products.This is particularly important for the firms with extensive product lines,where significant substitution or complementary inter-relationships exist between the various products.
The use of cross elasticity are as follows :

1. Pricing strategy related to own product :A firm may produce several related products.For example,Everest Toothpaste produces both brush and tooth paste.These goods are also complements.Hence more tooth paste can be sold if the price of toothpaste is reduced.Likewise,Everest brewery ltd.produces San Miguel and Tiger beer.
2. Pricing strategy related to others product:Several firms in the country produce complementary goods and substitute goods.The price of one firm affects the demand for other firms product.If a having many rivals producing substitute goods raise price,it many have to lose the customers substantially.Hence,an analysis of cross elasticity between own products and rivals products is essential to design appropriate pricing policy.
3. Measure interrelationship between industries:The cross elasticity is used in industrial organization to measure interrelationship among industrial.For example,one firm be the sole supplier of a particular product in the market.But if cross elasticity between the firm's product and products of related industries is large and positive,the firm through a monopolist in a narrow sense,will no be able to raise its prices without losing sales to other firms in related industry.
4. Classification of industries :The cross elasticity is useful in determining the boundaries between industries.Sometime problem occurs as to which firm should be included in which industries.For example,whether the production of car and truck should be classified as one industry or two industries.The cross elasticity become a basis situation.The firms having high positive cross elasticity should be included in one industry in other industry.
5. Classification of goods and markets :The goods markets are classified on the basis of elasticity of demand.For example,the goods are classified into substitute goods and complementary goods on the basis of cross elasticity of demand.If the cross elasticity between two goods is positive,these goods are substitute.On the other hand,if the cross elasticity is negative,these goods are complementary.

Prof.Bain has classified market structure on the basis of cross elasticity.In how view,if the cross elasticity is infinite,the market structure is perfectly competitive.Likewise,if the cross elasticity is high or these are existences of substitute,the market structure is imperfect.

Income elasticity

The knowledge of income elasticity is a visit source of information in business decision making.The income elasticity is useful in following ways:

1. Determine the effect of changes in economic activity :The knowledge of income elasticity is useful in determining the effect of change in business activity on various industries.The firms whose demand functions have high income elasticity will have good growth opportunities in an expanding economy.So,in their plans,the forecast of aggregate economic activity will be important.
2. Marketing activity :The income elasticity can play an important role in marketing activities of a firm.If capital or household income is found to be an important determinant of the demand for a particular product,this can affect the location and nature of sales outlets.It can also have impact on advertising and promotional activities.In case of goods having high income elasticity.It is better to make significant promotional effort due to the potential for substantially increased future business as the income increase.
3. Design marketing strategy :The income elasticity is useful in designing marketing strategy or targeting marketing efforts.For example, if a firm is specialised in expensive ladies cloths,rich ladies are its prime customers as the rich people are the prime customers or luxury goods.Hence,the firm should concentrate its marketing efforts in the media such as television that reached to the wealthy segment of the population.For good such as washing soaps which are widely used by average people,the firm can select ratio promotional activities.
   

Public policy decision

The concept of elasticity of demand is equally importance in public police formulation as mentioned below:

• Declaration of public utilities :The concept of elasticity helps the government to decide which industries should be declared as public utilities and run by itself.If the demand for the product of a firm is inelastic,the government can declare that industry as public utility and run by itself,because the private monopolist can exploit the people due to inelastic demand.
• Determination of terms of trade :The concept of elasticity of demand helps to increase the gains of international trade.It enable the government to determine the terms of trade between two countries.The terms of trade refers to rate of exchange of goods of one country with other country.If the demand for foreign good is inelastic in local market,high price can be fixed by foreign countries.Likewise,if the demand for domestic product is inelastic in foreign market,we can fix high price.
• Determination of rate of foreign exchange :The concept of elasticity of demand is useful in determination of the rate of foreign exchange of domestic currency.The government should study the elasticity of export and import demand before devaluation or revaluation.The effects of devaluation or revaluation on balance of payment can be known only if the elasticity of demand is known.
• Importance in fiscal policy :The concept of elasticity of demand important is fiscal policy,particularly in formulation of tax policy.The government or the finance minister will have to known the elasticity of demand before imposing taxes.The imposition of taxes increase the price of commodities.Hence,if the demand for a commodity is elastic,the demand decision.But if the demand is inelastic,the public revenue increase.Hence,the government can impose high taxes in the commodities having inelastic demand except the necessary goods.
  

Use of different types of elasticity of demand in price elasticity

The concept of elasticity of demand has theoretical and practical importance.The importance and use of three main types of elasticity of demand has been explained below:

pricing decisions
The concept of elasticity of demand is of considerable importance is pricing decisions or price determination.The use of this concept in pricing decision can be further subdivided into following:

• Price of products:The knowledge of price elasticity makes it easier to decide whether price increase or decrease is desirable or net.For example,if demand is elastic,it is desirable to reduce price.On the other hand,if demand is inelastic to increase price.In case of commodities of utmost importance which have no substitutes.Price can be increase without reducing sales.But in case of luxuries or commodities having substitutes,price increase leads to low sales and profit is reduce.The firms in imperfect competition including will have to know the price elasticity of demand in determination of price.If the elasticity of demand for the product is inelastic,form can charge high price.If the demand is elastic the forms will have to loss the customers if the price is increased.The monopoly firm,thought have the power to fix the price of if product,has to consider elasticity while determining price.Because,the distant substitutes of his product may exist even if the close substitutes do not exist.
• Pricing of factors of production :The concept of elasticity of demand is useful in the determination of price of factors of production."If the demand for factors of production are more inelastic,the producers are prepare to pay more price for these factors.Likewise,if the demand for the factors of production is more elastic,the producers are prepared to pay less price for the factors.For example,if the demand for labour in an industry is inelastic,the labour unions can easily increase wages.But if demand is elastic,the wages cannot be raised too much.
• Pricing of joint products:Some goods are products jointly due to some reasons such as meat and wool production in sheep farming or sugar and wine production in a sugar industry.It is difficult separate the cost of production of these two goods.This make it difficult to determine the price on the basis of cost.In such a situation,the price is determined on the basis of the elasticity of demand of these two products. In other words,high price is set up for the good having inelastic demand and low price for the good having elastic demand.
  

Measuring income elasticity at a point on an income demand curve

The effect of income on demand fro a commodity,other things remaining constant is called income demand.The curve that shows the quantity demanded of a commodity at different levels of income is called income demand curve of Engel.This curve shows that demanded is the function of income.
The consumers buy some commodities like food on equal quantity.In this situation the income demand curve is almost vertical.If the people increase the purchase of the commodity more rapidly than the increase in income,the income demand curve is almost horizontal such as ornaments.
In general,people demand more of a commodity when income increase.Hence,the income demand curve slopes upward to the right or has positive slope.This happens in case of normal goods.If the quantity demanded falls with increase in income,the income demand curve has negative slop.This happens in case of inferior goods.The income effect is negative.
The measurement of the income demanded curve having positive slope has been presented in the figure below.

Kinds of elasticity of demand

Broadly speaking,there are three main types of elasticity of demand.They are price elasticity,income elasticity and cross elasticity.

1. Price elasticity of demand
   

In general,elasticity of demand means price elasticity of demand.This concept is most popular and most frequently used.Price elasticity means the responsiveness of quantity demanded to the change in price.the price elasticity of demand is defined to be the percentage change in quantity demanded resulting from 1 percent with change in price.The price elasticity sows as what at rate the demand changes with change in price.In the words of C.E.Ferguson -"Price elasticity is the proportionate change in quantity demanded divided by the proportionate change in price."
Ep=Q/P*P/Q=500/-1*10/2000=-2.5
It shows that the quantity demanded increase by 2.5 percent with 1 percent fall in price.The minus sing shows the inverse relationship between price and quantity demanded.In general this sing is not used,since efficient of elasticity of demand.The coefficient and shows elastic,unitary elastic,inelastic,perfectly inelastic and perfectly elastic demand respectively.

Elasticity of demand

The tern elasticity denotes the quantity of a good that can expand and contract.Hence,the change in quality demanded due to change in price is called elasticity of demand.The concept of elasticity of demand was introduced in economics by economists like Cournot,J.S.Mill.The credit is given to Dr.Alfred Marshall for the development of the concept.
The law of demand tells that the quantity demanded of a commodity varies investment with price.But it does not tell how much quantity demanded change with change in price.This task is accomplished by quantity demand change with in change price.
In the words of Alfred Marshall -"The elasticity of demand is a market is great or small as the amount demanded increase much or little for a given fall price and diminished much or little for a given rise in price."
According to Stonier and Hague -"Elasticity of demand is,therefor,a technical term used by the economists of describe the degree of responsiveness of the demand for the commodity to a fall in its price."
In brief,elasticity of demand measures the rate of change in quality demanded as a result of the change in price.