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Cross elasticity of demand

In economics, the cross elasticity of demand or crossprice elasticity of demand measures the responsiveness
of the demand for a good to a change in the price of
another good. It is measured as the percentage change
in demand for the rst 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 inecient
decreased by 20%, the cross elasticity of demand would
be: 20%
10% = 2 . A negative cross elasticity denotes
two products that are complements, while a positive cross
elasticity denotes two substitute products. These two key
relationships may go against ones intuition, but the reason behind them is fairly simple: assume products A and
B are complements, meaning that an increase in the demand for A is caused by an increase in the quantity demanded for B. Therefore, if the price of product B decreases, then the demand curve for product A shifts to
the right, increasing As demand, resulting in a negative
value for the cross elasticity of demand. The exact opposite reasoning holds for substitutes.

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.

1.1 Selected cross price elasticities of demand


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

2 See also
Economics
Supply and demand
Elasticity (economics)

Results for main types of goods

Price elasticity of demand


Price elasticity of supply

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 for fuel will rise. In the
case of perfect substitutes, the cross elasticity of demand
is equal to positive innity (at the point when both goods
can be consumed). 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.

Income elasticity of demand


Arc elasticity
Yield elasticity of bond value

3 Notes
[1] Bordley, R., Relating Cross-Elasticities to First
Choice/Second Choice Data, Journal of Business and
Economic Statistics, (1985).

When goods are substitutable, the diversion ratio, which


quanties 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

[2] Frank (2008) p.186.

4 References
Frank, Robert (2008). Microeconomics and Behavior (7th ed.). McGraw-Hill. ISBN 978-0-07126349-8.
1

External links
Database for Commodity Elasticity at Food and
Agricultural Policy Research Institute, University of
Iowa

EXTERNAL LINKS

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