Cross elasticity of demand

Are you

demandabl

e?

In economics there are three types of elasticity of demand:-

Price Elasticity of Demand.

Income Elasticity of Demand.

Cross Elasticity of Demand.

THE CROSS ELASTICITY OF DEMAND OR CROSS-PRICE ELASTICITY OF DEMAND MEASURES THE

RESPONSIVENESS OF THE DEMAND FOR A GOOD TO A CHANGE IN THE PRICE OF

ANOTHER GOOD

Cross Elasticity of Demand

TYPES OF CROSS ELASTICITY OF DEMAND

Negative Cross Elastici

ty of deman

d.Positive Cross

Elasticity of

demand.

NEGATIVE CROSS ELASTICITY

A negative cross

elasticity denotes two

products that are

Complements, i.e. when

the price of a

compliment product

rises, demand of other

product falls.

POSITIVE CROSS ELASTICITY

While a Positive Cross

Elasticity denotes two

Substitute Products i.e.

if the

Price of good 1 rises the

demand of good 2 will

rise.

SUBSTITUTE GOODS

Substitute goods are alternative i.e. those products that can be used at the place of other products. There XED will be

positive,

The weak substitutes like tea and coffee will have a low XED.

Brown bread and wheat bread are close substitutes so XED is higher

Coffee & tea are substitute

goods

Petrol & car are complimentary

goods

Complementary goods- These are goods which are used together, therefore XED is negative.

If the price of car increases, then there will be a fall in demand for petrol.

When setting prices firms will have to look at what alternatives the consumer has, if there are no close

substitutes they will be able to increase the price. For this reason firms spend a lot of money on advertising to

differentiate their products. 

Thank you