2a) Explain factors which might influence the cross-price elasticity of demand between different products. (10) Show Cross Elasticity of Demand (XED) could be defined by showing a formula which is: Percentage change in quantity demanded of product A/ Percentage change in price of a product B. Cross Elasticity of demand shows whether or not goods depend on each other. There are many factors that might influence the XED between different products. Lets say that the two products that will be used in order to explain this concept are: snowboards as product A, and snowboard bindings as product B. The price for product A was 50$, while good B costed 15$. At one point though, a price of raw materials increased due to their limited amount, resulting in a price of good A to rise. The price rose from 50$ 100$ (by 100%). This results in a decrease in demand for this product. As a price of something rises, the demand on it decreases. This is what happens in this case as well, as prce for good A rised, the demand on it fell because not as many people wanted to invest at the higher price. For the product B, the price rised only by 60%, from $15 24$ This connects to the product B because they are both depending on each other. If one has a snowboard, he needs bindings to use it, so therefore with a decreased demand on snowboards, people won’t be needing bindings as much neither. This results in decreased demand for both, good A and good B. Quantity of Snowbaords and Price of Bindings Let’s take a different approach now, on goods that don’t necessarily depend on each other. Good A in this case will be Lawnmowers, while good B are bicycles. Good A has it’s price of 25$ while good B costs 30$. At one point the price of good A raised up to $37(by 50$). With it’s increased price, the demand on lawnmowers had fell, but in this case, it resulted in a increased demand on good B. This happens because those two goods don’t depend on each other at all. Therefore, as one doesn’t buy a lawnmower, he has some money left over that could be spent on a bicycle. Change in the cost of product A did not affect the demand on good B. Factors which might influence the XED are mainly price changes of goods that shift demand for either one or both products up and down. producing black and White TVs should switch to colour and then HD TVs. Note what is a luxury good today may become an inferior good tomorrow as changing technology changes consumer expectations about goods. How primary products can present constraints to growthLow-income elasticity of demand. As income increases, demand for many food stuffs doesn’t really increase. As incomes increases, demand for tea, coffee and sugar don’t increase that much. Therefore, countries who rely on primary products may have lower income growth than countries producing manufactured goods, with a higher income elasticity of demand. Sales forecastingA firm can forecast the impact of a change in income on sales volume (Q), and sales revenue (P x Q). For example, a hypothetical car manufacturer has calculated that YED with respect to its luxury car is (+) 3, and it has also undertaken research to discover that consumer incomes will rise by 2% next year. It can now predict the impact of this change. Pricing policyKnowing YED helps the firm decide whether to raise or lower price following a change in consumer incomes. If incomes are falling and YED is positive, a reduction in price might help compensate for the reduction in demand. DiversificationFirms can diversify and offer a range of goods with different YEDs to spread the risks associated with changes in the level of national income. For example, a car manufacturer may produce cars with a range of YED values, so that sales are stabilised as the economy grows and declines. Presentation on theme: "Module Supply and Demand: Changes in Equilibrium"— Presentation transcript: 1 Module Supply and Demand: Changes in Equilibrium
2 What you will learn in this Module:
3 What Happens When the Demand Curve Shifts? 4
What Happens When the Demand Curve Shifts?
5 What Happens When the Supply Curve Shifts?
6 What Happens When the Supply Curve Shifts? 7 Simultaneous Shifts of Supply and Demand 8 Simultaneous Shifts of Supply and
Demand 9 Simultaneous Shifts of Supply and Demand 10 Simultaneous Shifts of Supply and Demand |