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Cross elasticity of demand

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In economics, the cross elasticity of demand or cross-price elasticity of demand Economics

Main page measures the responsiveness of the demand for a good to a change in the price of another
Contents good. It is measured as the percentage change in demand for the first good that occurs in
Featured content response to a percentage change in price of the second good. For example, if, in response
Current events to a 10% increase in the price of fuel, the demand of new cars that are fuel inefficient
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decreased by 20%, the cross elasticity of demand would be: .
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In the example above, the two goods, fuel and cars (consists of fuel consumption), are Categories · Topics · Economists
complements; that is, one is used with the other. In these cases the cross elasticity of Economic ideologies [show]
demand will be negative, as shown by the decrease in demand for cars when the price of The economy: concept and history
fuel increased. Where the two goods are substitutes the cross elasticity of demand will be Business and Economics Portal
positive, so that as the price of one goes up the demand of the other will increase. For This box: view • talk • edit
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 positive infinity.
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.

Two goods that complement each Two goods that are substitutes have Two goods that are independent
other show a negative cross elasticity a positive cross elasticity of demand: as have a zero cross elasticity of demand:
of demand: as the price of good Y rises, the price of good Y rises, the demand as the price of good Y rises, the
the demand for good X falls for good X rises demand for good X stays constant

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".

Selected XED's [edit]

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Below are some examples of the cross-price elasticity of demand of various goods[2]:

Good Good with Price Change XED

Butter Margarine +0.81
Beef Pork +0.28
Entertainment Food -0.72

See also [edit]

Economics
Supply and demand
Elasticity (economics)
Price elasticity of demand
Price elasticity of supply
Income elasticity of demand
Arc elasticity
Yield elasticity of bond value

References [edit]
1. ^ Bordley, R., "Relating Cross-Elasticities to First Choice/Second Choice Data", Journal of Business and Economic Statistics,
(1986).
2. ^ Frank (2008) p.186.

Categories: Consumer theory | Elasticity (economics)

This page was last modified on 5 October 2010 at 18:55.

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