In: Economics
1.a. Cross elasticity of demand measures the responsiveness in the quantity demanded of one good when the price for another good changes.
Two soft drinks may be Coke and Pepsi. If the price of my second choice i.e. Pepsi falls, there must be at least $1 decrease in price of Pepsi so that I can substitute Pepsi for coke.
To find cross price elasticity we can take following example- b. As we know that the elasticity measures the responsiveness of demand for a product due to change in its price. Now if the market becomes more competitive, this means that there must be many substitutes for a good in that market. So in this type of market when there is increase in price of a particular good than there is sharp decrease in its demand and vice-versa. This is because when there is increase in price of one product than people substitute it with other.
So it shows that when the market becomes more competitive the elasticity of demand for a particular firms good will become more elastic.