What is cross elasticity?

What is cross elasticity?

Cross elasticity of demand (XED) measures how the quantity demanded of one good responds to a change in the price of another good. It shows the relationship between two goods and helps determine whether they are substitutes or complements.

Formula:

XED=% change in quantity demanded of good A% change in price of good BXED = \frac{\% \text{ change in quantity demanded of good A}}{\% \text{ change in price of good B}}XED=% change in price of good B% change in quantity demanded of good A​

Types of Cross Elasticity:

1. Positive Cross Elasticity (XED > 0):
   • Occurs when the two goods are substitutes.
   • Example: If the price of Pepsi increases, consumers may buy more Coca-Cola, leading to a positive XED.
2. Negative Cross Elasticity (XED < 0):
   • Occurs when the two goods are complements.
   • Example: If the price of printers decreases, more people buy printers, which increases the demand for ink cartridges, leading to a negative XED.
3. Zero Cross Elasticity (XED = 0):
   • Occurs when two goods are unrelated.
   • Example: A price change in apples likely has no effect on the demand for cars, so the XED would be zero.

Significance of Cross Elasticity:

• Substitute goods: A high positive XED indicates that two goods are close substitutes, meaning consumers readily switch between them when prices change.
• Complementary goods: A strong negative XED shows that the goods are closely related in consumption, meaning a price increase in one will lower the demand for the other.

Cross elasticity helps businesses and policymakers understand market relationships and how price changes in one market can affect demand in another.

Also Read

• Explain demand elasticity
• Consumer Behavior: Utility, Indifference Curve, Consumer Surplus
• Types of Markets: Perfect Competition, Monopoly, Oligopoly
• Why Eid Milad un-Nabi is celebrated?
• Market Equilibrium: Determination of Prices
• Supply: Law of Supply, Elasticity