Cross elasticity of demand?

Question

Could someone please explain to me what would happen to the market for CD players if the price of CDs increases?

Obviously the quantity of CD players demanded would decrease, but would the price of CD players rise or fall?

Many thanks

Answer 1

I think the other answer is far to complicated. The answer for your question is actually quite simple.

CD players and CDs are compliment goods. When the price of one compliment good rises, then the demand for the other compliment good goes down (demand curve shifts to the left). So for your question, if the price of CDs rises, the demand for CD players would fall, this would lead to a lower equilibrium price and quantity for CD players. This sounds like an Econ 101 level question, I would recommend drawing a supply and demand graph, shift one of the curves and you will see this result for yourself.

Finally from the info you provided me cross elasticity of demand is irrelevant for this question. However if you left out information the cross elasticity of demand simply will tell you by how much, a change in price of CDs will affect the CD player market.

Answer 2

It's a difficult question to answer for several reasons.

1. CD players are a mature technology with very minimal cost. The difference in price between products is more about the whistles and bells and brand than it is about playing the CD.

2. Most everyone who owns a CD probably had multiple players already. The demand for new CD players is based more on replacement of old equipment or buying something for a new use.

3. Even if the music industry never sold another CD after this moment in time, there would still be a relatively flat level of demand because most people already own CDs and therefore need players for what they already own (refer to #2 here).

4. Because music CDs can also be played on DVD players, that further limits the need to actually replace a CD player if it goes bad.

In general, I think there would be very little change to the market for CD players based on the price of CDs. The only way I could see any dramatic change would be if the price of CDs dropped drastically then the demand for players might increase as people purchased more disks. If this lead to any kind of shortages or scarcity with players then the price might go up.

It's been too long since I took economics to remember what the actual economic theory is on the issue if you assume there was a direct link between the price of CDs and the demand for players.

Answer 3

If this is an " first year" economics question
The price of CD players will fall, from simple complementary goods theory.

If this is an " second year" question
The price of CD player will not be affected in the long run, and the burden of the cost will be beared by the decrease in demand of CDs in the long run.

If this is an "junior-senior year" economics question
CD price increases - investigate if this is because of a demand pull or a supply shcok. Assuming, this is for a supply shcok, then with constant demand for CD will explain the rise in price. The production of CD player in the short run cannot be changed sue to constraints. Therefore the short run will see an excess supply of CD players. Depending on how the producers of CD players forecast the price of CD's in the future they will adjust their production. Depending on the price elasticity of CD players the price will be set up. If the elasticity is is relatively inelastic they will obviously increase price of CD players hoping to generate more revenue by increasing profit on the margin, and vise vera if they deem elasticity as relatively elastic

Answer 4

You are half-way there.

As quantity demanded of CD players decreases, assuming supply of CD players is unchanged, the price of CD players falls.

(At the original price for CDplayers, there is an excess quantity supplied, so the market adjusts by having the price fall).

That's the economics.

But in real life, you should ask yourself whether a small change in the price of CDs will really affect the market for CD players. I'd say the price change must be quite substantial for that to happen.

Answer 5

cross elasticity of demand means how price of one product effect the demand of the other product which can be substitute or complimentry.in the first part of the question cd players and cd's are complimentary to each other so if price of the cd's increases then the demand for the cd players will decrease.
the answer for second part of question is that decrease in demand of cd players will not increase the price of the cd's because cd's are derived demand.

Answer 6

It is not a difficult question to answer if you look at it in the right scale of economic theory. CD players and CD's are complimentary products meaning you cannot use one alone, you need the other one like left shoe and right shoe. You cannot use left shoe alone but both together. So even if the price of CD's go up the demand for CD players might not come down but new technology can make them more cheaper. One can always opt for a lower rated in wattage power player when the price moves up. Music systems cover a wide range of product categories like substitutes, complimentary, exemplary etc; to cater to all the spectrum of consumers of music. So the price movement in CD need not raise the price but there will be offering of players in wider range of prices.

Answer 7

cd players and cds are complements, that is one is used with the other. Thus, their cross price elasticity of demand is negative. This means that if the price of one increases the other decreases.