Price Elasticity and Cross-Price Elasticity as Competitive Indicators
This essay examines the concept of price elasticity of demand and its application in identifying competing brands in the marketplace. Drawing on foundational microeconomic principles, the paper explains how the law of demand underlies consumer sensitivity to price changes, and how the availability of substitutes determines whether demand is elastic or inelastic. The essay then explores cross-price elasticity — the responsiveness of demand for one product following a price change in another — demonstrating mathematically that a positive cross-price elasticity coefficient indicates a substitution relationship between brands. The analysis concludes that price elasticity is a reliable tool for identifying a brand's competitors.
- Introduction: Price Elasticity and Brand Competition: Introduces price elasticity as a tool for identifying competitors
- The Law of Demand and Price Elasticity: Explains the law of demand and elasticity measurement
- Substitutes and the Determinants of Elasticity: Explains how substitute availability drives price elasticity
- Cross-Price Elasticity and Competing Brands: Links cross-price elasticity to brand competition
- Mathematical Representation of Cross-Price Elasticity: Presents the elasticity formula and its competitive implications
✍️ How to write this paper — guide, tools & examples ▾
What makes this paper effective
- The essay builds its argument logically, moving from a foundational economic law (the law of demand) to a specific applied concept (cross-price elasticity), ending with a mathematical formula that clinches the thesis.
- Each paragraph advances a single idea and links it explicitly to the central claim that price elasticity can identify competing brands, keeping the argument focused throughout.
- The use of a mathematical representation in the final analytical section demonstrates the author's ability to translate economic concepts into quantitative terms, strengthening credibility.
Key academic technique demonstrated
The paper demonstrates effective concept-to-application reasoning: it introduces a general economic principle, narrows it to a specific measurement tool, and then applies that tool to a real-world business problem (competitor identification). This layered structure is a standard technique in economics essays and shows the student's ability to connect theory to practice.
Structure breakdown
The essay opens with a framing statement about price elasticity and brand competition. It then grounds the discussion in the law of demand before explaining elasticity and the role of substitutes. The cross-price elasticity concept is introduced as the bridge between elasticity and competitor identification, and a final section presents the mathematical formula. A Works Cited list follows APA-style references.
Introduction: Price Elasticity and Brand Competition
This essay explores price elasticity of demand as a means of identifying a brand's competitors. The possibility of using price elasticity to identify a brand's competitors implies a substitution relationship between two brands and a corresponding relationship in their relative elasticity, known as cross-price elasticity. This essay explores both of those relationships.
The Law of Demand and Price Elasticity
It has been said of the law of demand — that the higher the price of a good, the less that consumers will purchase — that it is the "most famous law in economics, and the one that economists are most sure of." This law is so certain and so consistently observed because it effectively predicts consumer behavior. The law of demand is in fact one of the basic principles of microeconomics (Anderson, McClellan, Overton, & Wolfram, 1997).
The law of demand also makes it possible to measure how the price of a product or brand affects demand for it. The most commonly used method to measure consumers' sensitivity to price is price elasticity of demand, simply defined as the proportionate change in demand given a change in price (Anderson et al., 1997). When the price of a product goes up and demand for it falls, demand for the product is elastic. Conversely, when the price rises and demand remains unchanged, that demand is said to be inelastic.
Substitutes and the Determinants of Elasticity
Given the relationship between a brand's price and its elasticity, the single most important factor that influences elasticity is the availability of substitutes (Investopedia, 2011). When consumers perceive that product X can be used in place of product Y, the products are substitutes for each other and are therefore considered competing products, since consumers can substitute one for the other.
So what determines price elasticity of demand? The more close substitutes there are in the market, the more elastic demand for a product becomes; consumers can more easily switch their purchasing if the price of one product changes relative to another (AS Markets, n.d.). The law of demand thus affects not only consumption of one brand but also consumption of its substitutes — that is, its competing brands.
Price elasticity of demand also explains the fact that prices become more elastic when higher prices deter many consumers, who may choose to buy something less expensive instead. When a good or service has numerous substitutes, prices are more elastic and will shift with demand. In fact, availability of substitution is often a better predictor of price elasticity than demand alone (Ellis-Christensen, 2011). This correlation supports the conclusion that price elasticity can identify a competing brand.
Works Cited
AS Markets. (n.d.). Cross price elasticity of demand. Retrieved July 25, 2011, from
Anderson, P. L., McClellan, R. D., Overton, J. P., & Wolfram, G. L. (1997). Price elasticity of demand. Mackinac Center for Public Policy. Retrieved July 25, 2011, from http://www.mackinac.org/1247
EconPort. (2006). Cross price elasticity. Experimental Economics Center. Retrieved July 25, 2011, from http://www.econport.org/content/handbook/Elasticity/Cross-Price-Elasticity.html
Ellis-Christensen, T. (2011). What is price elasticity of demand? Retrieved July 25, 2011, from http://www.wisegeek.com/what-is-price-elasticity-of-demand.htm
Investopedia. (2011). Economics basics: Elasticity. Retrieved July 25, 2011, from http://www.investopedia.com/university/economics/economics4.asp
Create your account
Always verify citation format against your institution’s current style guide requirements.