Economics Online Tutor
CROSS ELASTICITY OF
DEMAND
THE CROSS ELASTICITY OF DEMAND, ALSO CALLED THE
CROSS-PRICE ELASTICITY OF DEMAND MEASURES THE
DEGREE TO WHICH DIFFERENT GOODS ARE RELATED.  IT
MEASURES THE RESPONSIVENESS OF QUANTITY DEMANDED
OF ONE GOOD TO A PRICE CHANGE OF ANOTHER GOOD.


THE FORMULA FOR THE CROSS ELASTICITY OF DEMAND IS:



CROSS ELASTICITY OF DEMAND = THE
PERCENTAGE CHANGE IN THE QUANTITY
DEMANDED OF ONE GOOD DIVIDED BY THE
PERCENTAGE CHANGE IN THE PRICE OF
ANOTHER GOOD



IF THIS FORMULA YIELDS A POSITIVE NUMBER, IT MEANS THAT
AS THE PRICE OF ONE GOOD INCREASES, THE QUANTITY
DEMANDED OF THE OTHER GOOD INCREASES: THE GOODS
ARE SUBSTITUTES.  THE HIGHER THE CROSS ELASTICITY, THE
CLOSER THE GOODS SERVE AS SUBSTITUTES.

IF THIS FORMULA YIELDS A NEGATIVE NUMBER, IT MEANS
THAT AS THE PRICE OF ONE GOOD INCREASES, THE QUANTITY
DEMANDED OF THE OTHER GOOD DECREASES: THE GOODS
ARE COMPLEMENTS.  CONSUMERS TEND TO BUY THE TWO
GOODS TOGETHER, AS IF THEY WERE A "PACKAGE DEAL".