Scribd
Upload
460 views3 pages

Cross Elasticity of Demand

Cross elasticity of demand measures how sensitive the quantity demanded of one good is to changes in the price of another good. It is positive for substitute goods, as a price increase of one good raises demand for its substitute. It is negative for complementary goods, as a price increase for one good lowers demand for goods used with it. Businesses use cross elasticity of demand to establish optimal pricing by considering demand relationships between their products and alternatives.

Uploaded by

Shubh Agrawal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
460 views3 pages

Cross Elasticity of Demand

Cross elasticity of demand measures how sensitive the quantity demanded of one good is to changes in the price of another good. It is positive for substitute goods, as a price increase of one good raises demand for its substitute. It is negative for complementary goods, as a price increase for one good lowers demand for goods used with it. Businesses use cross elasticity of demand to establish optimal pricing by considering demand relationships between their products and alternatives.

Uploaded by

Shubh Agrawal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

💡

Cross Elasticity of Demand


an economic term that evaluates how sensitive a quantity
requested of one item is to changes in the price of another good is
called as Cross Elasticity of Demand.

Cross Elasticity of Demand 1


🔑 Key Points
It evaluates how sensitive a quantity requested of one item is to changes in the
price of another good.

Because demand for one product rises as the price of the substitute good rises, the
cross elasticity of demand for substitute goods is always positive. Similarly, cross
elasticity of demand is negative or decreasing for complimentary goods.

💎 Formula
Mathematically, it is expressed as:

💰 Explanation
Cross Elasticity of Demand 2
Substitute Goods:

For substitute goods, cross elasticity of demand is always positive because as the price
of one commodity rises, demand for the other rises as well. In the instance of Pepsi and
Coca-Cola, for example, when the price of Pepsi rises, demand for Coca-Cola rises as
Pepsi customers switch to Coca-Cola since it is less expensive. This is mirrored in the
cross elasticity of demand formula, which shows positive increases in both the
numerator (% change in Coca-Cola demand) and denominator (% change in Pepsi
pricing).
Complementary Goods:

For complementary commodities, demand cross elasticity is negative. Because demand


for the primary commodity has decreased, an item closely connected with that item and
required for its consumption falls as the price of the main good rises. If the price of
gasoline rises, for example, demand for automobiles will fall since they are
complimentary items.

📍 Need for Cross elasticity of Demand:


Businesses utilise cross elasticity of demand to establish pricing for their products.
Products with no alternatives can be sold at greater costs since there is no demand
cross-elasticity to consider. On the other hand, incremental price changes to items with
alternatives are investigated in order to determine the needed level of demand and the
commodity's price.
Complementary goods are also purposefully priced based on cross-elasticity of
demand. Pens, for example, could be sold at a loss on the premise that demand for
related goods like refill ink would increase in the future.

🌻 Submitted by-
Tanisha Didwania-2120677

Cross Elasticity of Demand 3

You might also like