cross price elasticity of demand
Cross Price Elasticity of demand measures the responsiveness of demand for a product to a change in the price of other related products. We normally focus on the links between changes in the prices of substitutes and complements.
The formula for cross price elasticity of demand
Cross Price Elasticity of Demand (CPed) = % change in the demand for Good X % change in the price of Good Y
Show cross price elasticity of demand through diagrams
The main use of cross price elasticity concerns changes in the prices of substitutes and complements.
With substitute goods such as brands of cereal or washing powder, an increase in the price of one good will lead to an increase in demand for the rival product. Cross price elasticity will be positive. In recent years, the prices of new cars have been falling. This should increase the demand for new cars and reduce the demand for second hand cars and mass transport services such as bus travel (ceteris paribus)
With goods that are in complementary demand such as the demand for DVD players and DVD videos, when there is a fall in the price of DVD players we expect to see more DVD players bought, leading to an expansion in market demand for DVD videos
When there is no relationship between two products, the cross price elasticity of demand is zero.
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