CROSS ELASTICITY OF DEMAND
The quantity demanded of a particular good varies according to the price of
other goods. Cross elasticity of demand measures the responsiveness of the
quantity demanded of one good to changes in the price of another.
The formula for measuring cross elasticity of demand for good X is:
% change in quantity demanded of good X/% change in price of another good Y OR
% change in quantity demanded of good X DIVIDED BY% change in price of another good Y
Two goods which are substitutes will have a positive cross elasticity. An
increase in the price of one good (e.g. mars bars) will lead to an increase in
the quantity demanded of a substitute (e.g. snickers).
Two goods which are complements will have a negative cross elasticity. An
increase in the price of one good (e.g. computers) will lead to a fall in demand
of a complement (e.g. computer games).
The cross elasticity of two goods which have no relationship to each other
would be 0 (e.g. jelly and pot plants).
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