Scribd
Upload
92 views

Cross Elasticity of Demand

Cross elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of a related good. It can be positive, negative, or zero. Positive cross elasticity occurs between substitute goods, where a rise in one price increases demand for the other. Negative cross elasticity is between complementary goods - a price rise of one decreases demand for the other. Zero cross elasticity exists for unrelated goods whose demands do not impact each other. By understanding cross elasticity, organizations can anticipate demand changes and make better pricing decisions.

Uploaded by

Sushil Kapoor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
92 views

Cross Elasticity of Demand

Cross elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of a related good. It can be positive, negative, or zero. Positive cross elasticity occurs between substitute goods, where a rise in one price increases demand for the other. Negative cross elasticity is between complementary goods - a price rise of one decreases demand for the other. Zero cross elasticity exists for unrelated goods whose demands do not impact each other. By understanding cross elasticity, organizations can anticipate demand changes and make better pricing decisions.

Uploaded by

Sushil Kapoor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Cross Elasticity of Demand

By SUSHIL KAPOOR (Sep 2021)

The cross elasticity of demand can be defined as a measure of a proportionate


change in the demand for goods as a result of change in the price of related
goods. In the words of Ferguson, “The cross elasticity of demand is the
proportional change in the quantity demanded of good X divided by the
proportional change in the price of the related good Y”. The cross elasticity of
demand can be measured as:

ec = Percentage change in quality demanded of X


Percentage change in price of Y

Thus, mathematically, the cross elasticity of demand is stated as:

ec = QX x PY
PY QX
Here,
ec is the cross elasticity of demand

Qx = Original quantity demanded of product X

Qx = Change in quantity demanded of product X

Py = Original price of product Y

Py = Change in the price of product Y

Cross elasticity of demand can be categorised into three types, which are as
follows:

(a) Positive cross elasticity of demand: When an increase in the


price of a related product results in an increase in the demand for the main
product and vice versa, the cross elasticity of demand is said to be
positive. Cross-elasticity of demand is positive in case of substitute goods.

(b) Negative cross elasticity of demand: When as increase in the price


of a related product results in the decrease of the demand of the main
product and vice versa, the elasticity of demand is said to be negative. In
complementary goods, cross elasticity of demand is said to be
negative.

(c) Zero cross elasticity of demand: When a proportionate change in


the price of a related product does not bring any change in the demand for
the main product, elasticity of demand is said to be zero. In simple words,
cross elasticity is zero in case of independent goods.
By studying the concept of cross elasticity of demand, organizations can
forecast the effect of change in the price of a good on the demand for its
substitutes and complementary goods. Thus, it helps organizations in making
pricing decisions by determining the expected change in the demand for its
substitutes and complementary goods. Moreover, it helps an organisation to
anticipate the degree of competition in the market.

There are three types of elasticity of demand, namely price elasticity of demand,
income elasticity of demand, and cross elasticity of demand. The cross elasticity
of demand can be defined as measure of change in the demand for a good as a
result of change in the price of related goods. Cross elasticity of demand is
classified into three groups; namely positive cross elasticity of demand.

You might also like