Table4-6 Summary of Income Elasticity of Demand
The positive or negative signs of cross elasticities tell us whether products are substitutes or
complements.Measures of cross elasticity sometimes prove helpful in defining whether
producers of similar products are in competition with each other. For
example, glass bottles and aluminum cans have a high cross elasticity of
demand. The producer of bottles is thus in competition with the producer
of cans. If the bottle company raises its price, it will lose substantial sales
to the can producer. In contrast, men’s shoes and women’s shoes have a
low cross elasticity, and thus a producer of men’s shoes is not in close
competition with a producer of women’s shoes. If the former raises its
price, it will not lose many sales to the latter. Knowledge of cross
elasticity can be important in matters of competition policy, in which the
issue is whether a firm in one industry is or is not competing with firms in
another industry. We discuss competition policy in more detail in Chapter
12.
Income elasticity and cross elasticity are also concepts that become
clearer with practice. See the Study Exercises at the end of this chapter to
work through some examples. Table 4-6 offers a brief summary of the
concepts.
(ηY)