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Cross-price Elasticity of demand (cED) & advertisement elasticity of demand ( aed )

Managerial Economics Session - 12. Cross-price Elasticity of demand (cED) & advertisement elasticity of demand ( aed ). CED: Concept. CED: Types/Degrees. CED > 0 [Substitutes in consumption] CED < 0 [Complements in consumption]. CED: Calculation Methods.

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Cross-price Elasticity of demand (cED) & advertisement elasticity of demand ( aed )

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  1. Managerial Economics Session - 12 Cross-price Elasticity of demand (cED)&advertisement elasticity of demand (aed)

  2. CED: Concept

  3. CED: Types/Degrees • CED > 0 [Substitutes in consumption] • CED < 0 [Complements in consumption]

  4. CED: Calculation Methods • Point method used for calculating CED • At a particular price of related good (say Y) • Arc method used for calculating CED • Over an interval/range of price of related good (say Y)

  5. CED: Point Method Suppose general demand function is: Qd = 3200 – 10P + 0.05M – 24 PR If P = $60; M = $60,000, PR = $200, what is CED when PR = $200?

  6. CED: Arc Method Suppose general demand function is: Qd = 3200 – 10P + 0.05M – 24 PR If P = $60; M = $60,000,what is CED when PR increases from $200 to $210?

  7. CED: Business Implications • CED between products of competitors is positive • If the competitor of a firm reduces the price of product, the firm has to reduce price to avoid losing sales • If the competitor of a firm raises the price of product, the firm can raise or maintain the same price

  8. CED: Business Implications • CED between complementary products is negative • Increase in price of a product will reduce the demand for its complementary products (e.g., increase in car price will reduce the demand for tyre, car insurance, etc)

  9. Advertisement Elasticity of Demand (AED): Concept • AED measures responsiveness of quantity demanded of a product to changes in the advertisement expenditure on the product, other things remaining constant: • AED is generally positive

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