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cross elasticity of demand

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Introduction

Commentary Number 1 Cross Elasticity of Demand (XED) measures the relative sensitivity of a change in the quantity of a good with respect to a change in the price of another good. Here we will be talking about substitute and complements of goods. If goods are substitute to each other, when price of good A increase, demand for good B would increase giving XED a positive value. Same goods with different brand are normally substitutes. If goods are compliments of each other, the increase of good A would lead to a decrease in demand for good B giving XED a negative value. Badminton racquets and shuttlecocks are examples of these. Revenue and Total Revenue (TR) are some of the most important part in business and both these concepts come from knowing how to apply the knowledge of Price Elasticity. ...read more.

Middle

From that paragraph, we can say that the DiGi's '1 Low Flat Rate' prepaid plan has a lot of substitutes from other telecommunications company. The newest DiGi product mentioned here has a very low price because they have made it cheaper to make calls. Therefore, they have in fact lower down their price from P1 to P2 as shown in Graph 1. Since the products of other companies are substitute to this product, the demand for other goods will definitely decrease which is shown in Graph 2 as D1 to D2. Here we can see how the knowledge of XED is useful to the other companies in making their decisions. They in fact has decrease their price also in attempt to gain more demand which is clearly shown here as P1 to P2 in Graph 2. ...read more.

Conclusion

Another proof that their revenue is increasing is in paragraph 7 which says that their revenue in Sarawak is higher than the previous year. All this proofs that their product " 1 Low Flat Rate" is actually an elastic good that will bring in higher revenue at lower price. Further more, the Law of Demand highly agrees with this situation where in Graph 3 we can see that when they lower down their price from P1 to P2, they actually increased their demand from Q1 to Q2 which is a very high increase considering the low decrease in price which indicates they have an elastic good. In addition to this, the report also says in paragraph 6 that DiGi has quality products and services. People prefer this so acting as their non-price determinants of demand, quality will increase their demand even more. In other words, giving them higher revenue instead of loosing revenue as the report says. (746 words) ...read more.

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