Cambridge International as and a level Economics Ebook

3
Why might government planners be interested in 
the YED values of diff erent products?
Cross elasticity of demand
Many companies are concerned with the impact that rival 
pricing strategies will have on the demand for their own 
product. Remember that substitutes are characterised by
 
a 
positive XED: the higher the price, the more likely it is that 
consumers will buy a
 
cheaper substitute. In such cases there 
is a high degree of interdependence between suppliers, 
and the dangers of a rival cutting price are likely to be very 
signifi cant indeed.
Companies are increasingly concerned with trying to get 
consumers to buy not just one of their products but a whole 
range of complementary ones, e.g., computer printers and 
cartridges. XED will identify those products that are most 
complementary and help a company introduce a pricing 
structure that generates more revenue. For instance, market 
research may indicate that families spend most money at 
restaurants when special deals are off ered, even though 
the PED for meals is low. In this case, for example, the 
high negative cross elasticity between meal prices and the 
demand for soft drinks (such as Pepsi Cola and Coca-Cola) 
means that although the revenue from food sales may fall, 
the demand for soft drinks may increase. Th
is indicates that 
the restaurant may need to introduce a more sophisticated 
pricing structure by looking at the relationships between the 
demand for all products and services off ered.
Cautionary note
We have assumed that calculating demand elasticity values 
is straightforward. In fact there are enormous practical 
statistical problems, which mean that elasticity values are 
best seen as estimates. Th
is is because in all three cases we 
are trying to measure change in the market and this is by 
no means easy, as data for two points in time are required. 
For instance, consider the diffi
culties of calculating PED 
values from historical data. Have the price changes only 
been caused by supply variations? Have there been any 
non-price demand infl uences at work? Remember, if we 
are to calculate the PED value accurately, we need to 
separate out all the other infl uences and just measure the 
impact of the price change alone on quantity demanded. 
Collecting data from other sources, such as market