Cross Elasticity of Demand
Topics Covered:
- Definition of cross elasticity of demand
- Types of cross Elasticity of Demand
Definition:
Cross elasticity of demand is the percentage change in quantity demanded of one good (say X) to the percentage change in price of another related good (say Y). mathematically, it is expressed as;
Types of Cross Elasticity of Demand:
1. Positive Cross Elasticity of Demand (Exy > 0):
If there is positive relationship between percentage change in quantity demanded for commodity X and percentage change in the price of commodity Y, then it is called positive cross elasticity of demand. Goods that have positive cross elasticity of demand are known as substitute goods. Substitute goods are those goods which can be used in the absence of another goods. Coke and Pepsi, tea and coffee are some examples of positive cross elasticity of demand.
In the above figure, when the price of y commodity increases from OP to OP1 then the quantity demanded also increases from OM to OM1 respectively, which is called positive cross elasticity of demand.
2. Negative Cross Elasticity of Demand (Exy < 0):
If there is inverse relationship between percentage change in quantity demanded for good X and percentage change in price of good Y, then it is considers as negative cross elasticity of demand. Goods with negative cross elasticity of demand are called complementary goods. Complementary goods are those goods which are jointly used to satisfy the human wants. Complementary goods are petrol and bike, ink pen and ink, etc.
In the above figure, when the price of Y good (say petrol) decreases from OPy1 to OPy2 then the quantity demanded of good X (Say bike) increases from OQ1 to OQ2 which is called negative cross elasticity of demand.
