Answer to Question #140805 in Macroeconomics for sneha

Question

“There is a high cross elasticity of demand between new and old cars”. Discuss the
statement by explaining the features of cross elasticity of demand. Also compare and
contrast cross elasticity with other types of elasticities of demand.

Answer 1

Cross elasticity of demand measures the degree of responsiveness of the demand for a certain product to a given change in the price of another product. Most companies use the concept of cross elasticity of demand in the establishment of the prices in which to sell their products. There exists a high cross elasticity od demand between new and old cars since the demand for old cars is highly elastic. Old cars will sell at relatively low prices compared to new cars as they have been used for a while and this suggests how their demand is highly elastic. An elastic demand is the type in which the elasticity is greater than one which is an indication of high responsiveness to changes in prices. Conversely, inelastic demand refers to the demand whereby elasticity is less than one showing that it has low responsiveness to changes in prices.