In economics, the cross elasticity of demand or crossprice elasticity of demand measures the responsiveness
of the demand for a good to a change in the price of
another good. It is measured as the percentage change
in demand for the rst good that occurs in response to
a percentage change in price of the second good. For
example, if, in response to a 10% increase in the price
of fuel, the demand of new cars that are fuel inecient
decreased by 20%, the cross elasticity of demand would
be: 20%
10% = 2 . A negative cross elasticity denotes
two products that are complements, while a positive cross
elasticity denotes two substitute products. These two key
relationships may go against ones intuition, but the reason behind them is fairly simple: assume products A and
B are complements, meaning that an increase in the demand for A is caused by an increase in the quantity demanded for B. Therefore, if the price of product B decreases, then the demand curve for product A shifts to
the right, increasing As demand, resulting in a negative
value for the cross elasticity of demand. The exact opposite reasoning holds for substitutes.
2 See also
Economics
Supply and demand
Elasticity (economics)
In the example above, the two goods, fuel and cars (consists of fuel consumption), are complements; that is, one
is used with the other. In these cases the cross elasticity
of demand will be negative, as shown by the decrease in
demand for cars when the price for fuel will rise. In the
case of perfect substitutes, the cross elasticity of demand
is equal to positive innity (at the point when both goods
can be consumed). Where the two goods are independent,
or, as described in consumer theory, if a good is independent in demand then the demand of that good is independent of the quantity consumed of all other goods available to the consumer, the cross elasticity of demand will
be zero: as the price of one good changes, there will be
no change in demand for the other good.
3 Notes
[1] Bordley, R., Relating Cross-Elasticities to First
Choice/Second Choice Data, Journal of Business and
Economic Statistics, (1985).
4 References
Frank, Robert (2008). Microeconomics and Behavior (7th ed.). McGraw-Hill. ISBN 978-0-07126349-8.
1
External links
Database for Commodity Elasticity at Food and
Agricultural Policy Research Institute, University of
Iowa
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