Cross Price Elasticity of Demand

This measures how responsive the quantity demanded of one good responds to changes in the price of other goods. The formula, with Q still on top, is as follows:

 

Cross price elasticity of demand = % change in quantity of good X / % change in price of good Y

 

Two goods which are substitutes will have a positive cross elasticity. An increase in the price of one good, for example Pepsi, will lead to an increase in the quantity demanded of a substitute, for example Coca Cola.

 

Two goods which are complements will have a negative cross elasticity. An increase in the price of one good, for example Playstation 3, will lead to a fall in demand of a complement , for example Playstation 3 games.

 

The cross elasticity of two goods which have no relationship to each other would be 0, for example apples and shoes.

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