Cross-Price Elasticity of Demand

Cross-Price Elasticity of Demand (XED) is a measure of the responsiveness of the quantity demanded of one good or service to changes in the price of another good or service. It is calculated as the percentage change in quantity demanded of one good or service divided by the percentage change in price of another good or service.

There are three types of cross-price elasticity of demand:

1. Positive Cross-Price Elasticity of Demand: When the XED is positive, it means that the two goods or services are substitutes. An increase in the price of one good or service leads to an increase in the quantity demanded of the other good or service. For example, if the price of Pepsi increases, some consumers may switch to Coca-Cola, increasing the quantity demanded of Coca-Cola.
2. Negative Cross-Price Elasticity of Demand: When the XED is negative, it means that the two goods or services are complements. An increase in the price of one good or service leads to a decrease in the quantity demanded of the other good or service. For example, if the price of gasoline increases, it may lead to a decrease in the quantity demanded of automobiles, as people may choose to drive less or use public transportation instead.
3. Zero Cross-Price Elasticity of Demand: When the XED is zero, it means that the two goods or services are unrelated. A change in the price of one good or service has no effect on the quantity demanded of the other good or service.

Overall, the value of cross-price elasticity of demand can help businesses and policymakers understand how changes in the price of one good or service will affect the demand for another good or service, and can inform decisions about pricing strategies and marketing efforts.