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If a $10 \%$ decrease in the price of one product that you buy causes an $8 \%$ increase in quantity demanded of that product, will another $10 \%$ decrease in the price cause another $8 \%$ increase (no more and no less) in quantity demanded?
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This is Hello. To see a needy and original 10% increase in the price will generate an 8% increase in the quantity, that's what I'm going to answer your question about today. If there is an extra 10% decrease, the answer is not why. There are two effects that happen. The substitution effect is when there is a change in prices, and you want to have a replacement. You are going to make the migration to the consumption of another good when you change the prices. Depending on the good that we're talking about, it could go up or down. There is also an effect on income. When there is a change in prices or income, you will consume less or more of the good. The point is that there is no one effect. This won't happen a lot. You need to think about what the next effect will be, and what the total effect will be. With that, you will understand what will happen. There is not a homogeneity. The two effects coming to take the place of destination was clear and thank you very much.
Definition: Cross elasticity (Exy) tells us the relationship between two products. it measures the sensitivity of quantity demand change of product X to a change in the price of product Y. Price elasticity formula: Exy = percentage change in Quantity demanded of X / percentage change in Price of Y.. If the percentage change is not given in a problem, it can be computed using the following formula: Percentage change in Qx =
(Q1-Q2) / [1/2 (Q1+Q2)] where Q1 = initial Qd of X, and Q2 = new Qd of X. Percentage change in Py = (P1-P2) / [1/2 (P1 + P2)] where P1 = initial Price of Y, and P2 = New Price of Y. Putting the two above equations together:
Exy = {(Q1-Q2) / [1/2 (Q1+Q2)] } / {(P1-P2) / [1/2 (P1 + P2)]}
Characteristics:
Exy > 0, Qd of X and Price of Y are directly related. X and Y are substitutes.
Exy approaches 0, Qd of X stays the same as the Price of Y changes. X and Y are not related.
Exy < 0, Qd of X and Price of Y are inversely related. X and Y are complements.
Example:
1. If the price of Product A increased by 10%, the quantity demanded of B increases by 15 %. Then the coefficient for the cross elasticity of the A and B is :
Exy = percentage change in Qx / percentage change in Py = (15%) / (10%) = 1.5 > 0, indicating A and B are substitutes.
2. If the price of Product A increased by 10%, the quantity demanded of B decreases by 15 %. Then the coefficient for the cross elasticity of the A and B is :
Exy = percentage change in Qx / percentage change in Py = (- 15%) / (10%) = - 1.5 < 0, indicating A and B are complements.