Case study of Elasticites of

Demand in the real world

By,
Pratik Kabra (20)
Ravi Kadiwar(25)
Nishith Shah(53)
Pritesh Sheth(55)
 ELASTICITY

 Elasticity of demand is defined as the

percentage change in quantity demanded
caused by one percent change in the demand
determinant under consideration(e.g. price,
income, price of related goods etc), keeping
other determinants constant.
CROSS ELASTICITY:
 A cross elasticity is the effect on the
change in demand of one good as a
result of a change in price of related
goods.

 Cross Elasticity may

be Positive or Negative.
POSITIVE CROSS ELASTICITY
 When increase in Price of one good results
into increase in demand of related goods, The
Cross Elasticity of the goods is said to be
Positive.

 Goods with positive

Cross elasticity are
substitutes
NEGATIVE CROSS ELASTICITY
 When increase in Price of one good results
into decrease in demand of related goods, The
Cross Elasticity of the goods is said to be
Negative.

 Goods with negative

Cross elasticity are
Complementary goods
Estimated Cross-price Elasticity of Demand(Exy) between
Selected Commodities
Commodity X Commodity Y Cross- Price Elasticity
Tea (India) Coffee (India) Short run: 0.0385
Tea (India) Coffee (India) Long run: 0.3457
Margarine (US) Butter (US) 1.53
Pork (US) Beef (US) 0.40
Mutton/lamb (UK) Beef/veal (UK) 0.28
Pork (UK) Beef/veal (UK) 0.00
Natural gas (US) Electricity (US) 0.80
Coal (Ireland) Oil (Ireland) 0.70
Coal (Ireland) Natural gas (Ireland) 0.40
Entertainment (US) Food (US) -0.72
European cars US domestic & Asian cars 0.76
Asian cars US domestic & European cars 0.61
US domestic cars European & Asian cars 0.28
Automobile (Australia) Bus transportation (Australia) 0.07
Estimated Cross-price Elasticity of Demand(Exy) between
Selected Commodities
Commodity X Commodity Y Cross- Price Elasticity
Pork (US) Beef (US) 0.40
Mutton/lamb (UK) Beef/veal (UK) 0.28
Natural gas (US) Electricity (US) 0.80
Coal (Ireland) Oil (Ireland) 0.70
Coal (Ireland) Natural gas (Ireland) 0.40
European cars US domestic & Asian cars 0.76
Asian cars US domestic & European cars 0.61
US domestic cars European & Asian cars 0.28
Automobile (Australia) Bus transportation (Australia) 0.07

• Increase in Price of Commodity X by 1 Percent

results into increase in Demand of Commodity Y P2
by less than 1 percent but with different values
P1
showing different degree of substitution.
(Exy<1 - Relatively Inelastic).
Q2 Q1
Estimated Cross-price Elasticity of Demand(Exy) between
Selected Commodities
Commodity X Commodity Y Cross- Price Elasticity
Tea (India) Coffee (India) Short run: 0.0385
Tea (India) Coffee (India) Long run: 0.3457

• In Short Run Increase in Price of Tea by 1 Percent

will result into Increase in Demand of Coffee by just
0.038 percent.
• In Long Run Increase in Price of Tea by 1 Percent
will result into Increase in Demand of Coffee by
0.34 percent.

• Long run Cross elasticity of demand for most commodities is

much larger than the corresponding short-run Cross Elasticity
Estimated Cross-price Elasticity of Demand(Exy) between
Selected Commodities
Commodity X Commodity Y Cross- Price Elasticity
Margarine (US) Butter (US) 1.53
Pork (UK) Beef/veal (UK) 0.00

• Increase in Price of Margarine by

1 percent will result into increase in
demand of Butter by 1.53 percent , P2
i.e there is more than proportionate P1
increase showing high degree of substitution
between the goods.(Exy>1 - Relatively elastic) Q2 Q1

• There is no change in demand P2

of Beef/veal due to change in
price of Pork in UK. P1
(Exy=0 - Perfectly Inelastic).
Q
Estimated Cross-price Elasticity of Demand(Exy) between
Selected Commodities
Commodity X Commodity Y Cross- Price Elasticity
Entertainment (US) Food (US) -0.72

• Increase in Price of Entertainment goods by 1 percent leads to

a 0.72 percent reduction in the demand for Food in US. This
means that both the commodities are complementary to each
other and are demanded jointly.

P2

P1

Q2 Q1
APPLICATION OF THEORY

 Deriving appropriate Pricing Strategy.

 Analyze the effect of change in the price

of one product to the demand of others.

 Elasticity is the concept, economists use

to describe the steepness or flatness of
curves or functions.