Cross-Price Elasticity of Demand
Cross-Price Elasticity of Demand
Cross-price elasticity of demand measures the responsiveness of quantity demanded of one good (or service) to the change in the price of another good. It is expressed as the ratio of the percentage change in quantity demanded of one commodity to the percentage change in the price of another commodity.
For 2 commodities, \(A\) and \(B\), cross-price elasticity of demand for commodity \(A\) with respect to the price of commodity \(B\) is denoted as \(E_{AB}\) and can be expressed as:
\(E_{AB} = \cfrac{\text{percentage change in quantity demanded of A}}{\text{percentage change in price of B}}\)
Types of Cross-Price Elasticity of Demand
Type |
\(E_{AB}\) |
Interpretation |
| High Cross-Price Elasticity | \(1 < E_{AB} < \infty\) | A and B are close substitutes |
| Low Cross-Price Elasticity | \(0 < E_{AB} < 1\) | A and B are poor substitutes |
| Unit Cross-Price Elasticity | \(E_{AB} = 1\) | |
| Negative Cross-Price Elasticity | \(E_{AB} < 0\) | A and B are complementary goods |
| Infinite Cross-Price Elasticity | \(E_{AB} = \infty\) | A and B are perfect substitutes |
| Zero Cross-Price Elasticity | \(E_{AB} = 0\) | A and B are not related |
This lesson is part of:
Theory of Demand
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