ross-price elasticity of demand is another important measure that we make use of and observe regularly. It is the change in the quantity demanded of commodity X due to the change in the price of commodity Y.
Consider what happens to goods that are substitutes of each other, such as products on Myntra and Jabong. If the prices of shoes on Myntra increase, people switch to Jabong. (It’s okay, the revenue stays in the family.) This means that the demand for goods on Jabong increases with the increase in prices on Myntra and decreases when Myntra declares a sale (reduction in prices). This is called positive cross elasticity of demand.
In case of complementary goods such as gin and tonic , the change in the price of gin will cause a proportionate change in the opposite direction in the quantity of tonic water demanded. If the price of gin increases, lower quantities of it shall be consumed (unless you’re an alcoholic) and as a corollary, less tonic water shall be required, leading to a proportionate decrease in its demand. This is called negative cross elasticity of demand.
Price elasticity and its various facets are used by business owners in measuring consumer response to price changes, policymakers to calculate tax incidence (effect of a particular tax on actions of citizens), and government to assess benefits (or the lack of) of subsidies, among others.
In another episode, our man Stringer passes on the lessons of elasticity as learned by him in his college class to his lackeys working at the print and copy business they run as a front for their illegal narcotics operation.
Needless to say, with his economic chops, Stringer Bell could have picked writing for Pragati as an alternative career.