Cross Price Elasticity of Demand

This updated revision video looks at cross price elasticity of demand.

Key revision notes on cross price elasticity of demand

Cross-price elasticity of demand (XED) measures the responsiveness of demand for good X following a change in the price of good Y (where Y is a related good).

With cross-price elasticity, we make an important distinction between substitute and complementary goods.

Cross price elasticity of demand = % change in demand for X / % price in Y

Substitutes are goods or services in competitive demand. Substitutes have a positive cross price elasticity of demand. (I.e. XED > 0) which means that an increase in the price of one product will lead to a rise in demand for a substitute.

Complements are goods or services in joint demand. Cross price elasticity of demand (XED) for two complements will be negative. An increase in the price of Good T will lead to a contraction in demand for T and a fall in demand for a complement, good S.