Cross Elasticity of Demand

Posted in Finance, Accounting and Economics Terms, Total Reads: 2530
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Definition: Cross Elasticity of Demand

Elasticity of demand is the measurement of the change in demand of a good affected by a change in its price or income.

Cross elasticity of demand measures the change in demand of good due to the change in price of another good. It is due to 2 reasons: -

  1. Substitute goods
  2. Complementary goods

In case of substitute goods, a rise in price of substitute goods would raise the demand of the good and a fall in price of substitute goods would reduce the demand of the good.

Accordingly in case of complementary, a rise in price of complementary goods would reduce the demand for the good and vice-versa.

Example: - An increase in price of sugar would increase the demand for jaggery which may act as a substitute for sugar. But an increase in price of table tennis racket may reduce the demand of table tennis balls as they are complementary.

Cross Elasticity

Formula

Cross elasticity of demand =   % change in the quantity demand of product X

% change in the price of product Y



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