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    Cross Elasticity of Demand

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    milind_kurbetkar
    Cross elasticity of demand measures the responsiveness of the demand for one good to changes in the price of another good. It is calculated as the percentage change in demand for the first good divided by the percentage change in price of the second good. Goods that are complements have a negative cross elasticity, meaning demand for one falls when the price of the other rises. Substitute goods have a positive cross elasticity, so demand for one rises when the price of the other increases. Independent goods have a cross elasticity of zero, so their demands do not impact each other.

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    Cross Elasticity of Demand

    Uploaded by

    milind_kurbetkar
    357 views2 pages
    Cross elasticity of demand measures the responsiveness of the demand for one good to changes in the price of another good. It is calculated as the percentage change in demand for the first good divided by the percentage change in price of the second good. Goods that are complements have a negative cross elasticity, meaning demand for one falls when the price of the other rises. Substitute goods have a positive cross elasticity, so demand for one rises when the price of the other increases. Independent goods have a cross elasticity of zero, so their demands do not impact each other.

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    Cross elasticity of demand measures the responsiveness of the demand for one good to changes in the price of another good. It is calculated as the percentage change in demand for the first good divided by the percentage change in price of the second good. Goods that are complements have a negative cross elasticity, meaning demand for one falls when the price of the other rises. Substitute goods have a positive cross elasticity, so demand for one rises when the price of the other increases. Independent goods have a cross elasticity of zero, so their demands do not impact each other.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    357 views2 pages

    Cross Elasticity of Demand

    Uploaded by

    milind_kurbetkar
    Cross elasticity of demand measures the responsiveness of the demand for one good to changes in the price of another good. It is calculated as the percentage change in demand for the first good divided by the percentage change in price of the second good. Goods that are complements have a negative cross elasticity, meaning demand for one falls when the price of the other rises. Substitute goods have a positive cross elasticity, so demand for one rises when the price of the other increases. Independent goods have a cross elasticity of zero, so their demands do not impact each other.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
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    Cross elasticity of demand

    From Wikipedia, the free encyclopedia

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    In economics, the cross elasticity of demand and cross price elasticity of demand
    measures the responsiveness of the demand of a good to a change in the price of another
    good.

    It is measured as the percentage change in demand for the first 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 inefficient
    decreased by 20%, the cross elasticity of demand would be −20%/10% = −2.

    The formula used to calculate the coefficient cross elasticity of demand is

    or:

    Two goods that complement each other show a negative cross elasticity of demand: as the
    price of good Y rises, the demand for good X falls

    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 of
    fuel increased. In the case of perfect complements, the cross elasticity of demand is
    negative infinity.

    Where the two goods are substitutes the cross elasticity of demand will be positive, so
    that as the price of one goes up the demand of the other will increase. For example, in
    response to an increase in the price of carbonated soft drinks, the demand for non-
    carbonated soft drinks will rise. In the case of perfect substitutes, the cross elasticity of
    demand is equal to infinity.

    Where the two goods are independent, 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.

    When goods are substitutable, the diversion ratio—which quantifies how much of the
    displaced demand for product j switches to product i—is measured by the ratio of the
    cross-elasticity to the own-elasticity multiplied by the ratio of product i's demand to
    product j's demand. In the discrete case, the diversion ratio is naturally interpreted as the
    fraction of product j demand which treats product i as a second choice,[1] measuring how
    much of the demand diverting from product j because of a price increase is diverted to
    product i can be written as the product of the ratio of the cross-elasticity to the own-
    elasticity and the ratio of the demand for product i to the demand for product j. In some
    cases, it has a natural interpretation as the proportion of people buying product j who
    would consider product i their "second choice".

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