Cross Price Elasticity of Demand

• cross price elasticity of demand = XED
• XED measures the responsiveness of quantity demanded of a good / service given a change in price of another
• XED = %∆Qda (of one good) / %∆Pb (of another)
• %∆ = difference / original x 100
• if XED is positive it means that the two goods are substitutes
• if XED is negative it means that the two goods are complements
• XED tells us if two goods are complements or susbtitutes
• if XED >( 1) demand between the goods is price elastic meaning they are strongly related

  when the price of one good changes the Qd for the other changes proportionately more than the other
• if XED < 1 demand between the goods is price inelastic (weakly related)

  when the price of one good changes the Qd for the other changes proportionately less than the other.
• if XED = 0 demand between the goods is perfectly price inelastic (no relationship between those goods)
• • Cross-price elasticity of demand measures how the quantity demanded of one good (Good i) changes in response to a price change in another good (Good j). It reflects the relationship between related goods.
• Positive Cross-Price Elasticity:

  • Occurs when the two goods are substitutes. If the price of Good j increases, consumers switch to Good i, increasing the demand for Good i.
• Zero Cross-Price Elasticity:

  • If the cross-price elasticity is zero or close to zero, the two goods are independent, meaning a change in the price of one has no effect on the demand for the other.
• Negative Cross-Price Elasticity:

  • Occurs when the two goods are complements. If the price of Good j rises, the demand for Good i falls because the two goods are often consumed together.
• own price elasticity of demand = PED
• • Substitutes have positive cross-price elasticities (e.g., Coke and Pepsi).
  • Complements have negative cross-price elasticities (e.g., cars and gasoline).