Question

Elasticity demand difference between Fabricated metal product manufacturing and electronic and appliance stores

Answer 1

Firstly, what is price elasticity of demand? Now, a change in the price of a good affects its demand. PED helps to measure this responsiveness of buyers to the change in the price of a product, i.e. whether an increase or decrease in the price is likely to cause an increase or decrease in the quantity demanded by buyers. It is calculated by dividing the % change in quantity demanded by the % change in price.

Now, goods are of several types, normal, inferior, luxury etc. and showcase various types of relations like substitutes, complements, independant etc.

When we talk about the above example, fabricated metal manufaturing is directly related to electronic and appliance stores. Appliances, elecronics, cars, phones etc. all are consumer products which are achieved through metal fabrication. Without metal fabrication manufacturing, no electrical systems would run, no vehicles would be operational and no applications would work.

So, we can say that fabricated metal products manufactured and electronic and appliance stroes exhibit a complementary relationship. Complements or complementary goods or services are those which are used in conjunction with another good or service. In this case, the maufacturing service is closely linked to the services provided by the electronic stores. In such a relationship, one good/service's appeal/demand is elevated due to the increase in popularity or demand for its complement.

This is known as cross-price elasticity of demand. It measures the change in the demand for one good which occurs in respose to a change in the price of the other good. It is computed by the formula E_1,2 = % change in quantity demanded for good 1/ % change in price of good 2.

If the price of one of the complementary goods increases, i.e. if price of fabricated metal manufacturing increases, the price of its complement, i.e. the electronics and appliances in the store will also increase, and so the demand will decrease. Similarly, if price of fabricated metal falls, the quantit demanded of elecronics and appliances will increase. Also, if quantity demanded of electronics and appliances increase, the quantity demanded of fabricated metal will increase.

So, these two goods exhibit a negative cross price elasticity , as the price of one good increases, the demand for the other good falls. Take a look at fig 1. There is a movement from Point A to point B on the graph. This is because the quantity demanded of electronics/appliances fall from OQ₀ to OQ₁ as the price of fabricated metal increases OP to OP₁.