Cross Elasticity of Demand

The cross elasticity of demand is a measure of how responsive the demand for one good is to a change in the price of another good. It is calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of the other good.

A positive cross elasticity of demand means that the two goods are substitutes, and that a decrease in the price of one good will lead to an increase in the demand for the other good. For example, if the price of coffee decreases, people may be more likely to buy tea instead.

A negative cross elasticity of demand means that the two goods are complements, and that a decrease in the price of one good will lead to a decrease in the demand for the other good. For example, if the price of gasoline decreases, people may be less likely to buy cars.

The cross elasticity of demand is important for understanding how changes in the price of one good can affect the demand for other goods. It can also be used to predict how changes in the price of one good will affect the total revenue of a firm that sells both goods.

In addition to the cross elasticity of demand, there are two other important elasticities of demand: the price elasticity of demand and the income elasticity of demand. The price elasticity of demand measures how responsive the demand for a good is to a change in its price. The income elasticity of demand measures how responsive the demand for a good is to a change in income.

The cross elasticity of demand, the price elasticity of demand, and the income elasticity of demand are all important tools for understanding how changes in the price, income, and availability of goods affect consumer demand.