Cross Elasticity

Cross Elasticity: A change in the demand for one good in response to a change in the price of another good represents cross elasticity of demand of the former good for the latter good.

Cross elasticity can be expressed as
The cross price elasticity of product A with product B =(ΔQA/QA)/(ΔPB/PB)
where QA is the quantity sold of A
ΔQA is the change in the quantity of A sold
PB is the price of B
ΔPB is the change in the price of B.

Example - Coke and Pepsi are substitutes of each other. Now, suppose the price of coke increases and with the increase in price of coke, some of the customers would stop buying coke and would shift to pepsi. So. demand of pepsi would increase.

i,e. Increase in demand of pepsi due to increase in price of Coke is the example of cross elastisity

If two goods are perfect substitutes for each other cross elasticity is infinite and if the two goods are totally unrelated, cross elasticity between them is zero.

Goods between which cross elasticity is positive can be called Substitutes, the good between which the cross elasticity is negative are not always complementary as this is found when the income effect on the price change is very strong.


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