Cross Elasticity of Demand (Ex)

• Cross Elasticity of Demand is..

  This measures the relationship between two goods by determining how responsive the quantity demanded of one good is if the price of a different good changes
• Cross Elasticity of Demand (Ex) formula is…

  % change in Quantity Demanded of Good A/ % Change in price of Good B
• Ex formula- long one is

  Qda2 - Qda1 /Pb2 - Pb1 x Pb1 + Pb2/Qda1 + Qda2
• What do a and b stand for

  A = good A

  B = good B
• cross elasticity of Demand Coefficient meanings

  Ex is negative - complementary goods

  Ex is positive- substitute goods

  Figures between -1 and 1 = represent a weak relationship only
• Good A

  The good for which we are measuring the change in quantity demanded in response to a change in the price of Good B.
• Good B

  The good for which we are measuring the change in price in response to a change in the quantity demanded of Good A.
• Positive Cross Elasticity of Demand

  Indicates that the two goods are substitutes, meaning that an increase in the price of Good B will lead to an increase in the quantity demanded of Good A, and vice versa.
• Negative Cross Elasticity of Demand

  Indicates that the two goods are complements, meaning that an increase in the price of Good B will lead to a decrease in the quantity demanded of Good A, and vice versa.
• Zero Cross Elasticity of Demand


  Indicates that the two goods are unrelated, meaning that a change in the price of Good B has no effect on the quantity demanded of Good A, and vice versa.
• Zero Cross Elasticity of Demand


  Indicates that the two goods being analyzed are unrelated, meaning that a change in the price of one good has no effect on the quantity demanded of the other good.
• Unrelated goods


  Goods that have no substitution or complementary relationship, such as a car and a haircut.
• Negative CoED

  Indicates that the two goods are complements, meaning that an increase in the price of one good will lead to a decrease in the quantity demanded of the other good.
• Complements


  Two goods that are used together in consumption, such as hot dogs and hot dog buns. When the price of one good increases, the quantity demanded of the other good decreases, resulting in a negative Cross Elasticity of Demand (CoED).
• Substitutes

  Two goods that can be used in place of each other in consumption, such as Coke and Pepsi. When the price of one good increases, the quantity demanded of the other good increases, resulting in a positive CoED.