Cross price elasticity of demand (XED)

Cross price elasticity of demand and its determinants

Cross price elasticity of demand: measures the responsiveness of a demand for one good to a change in price of another good.

• Movement along the curve for one good causing a shift in demand for another good

Determinants of XED:

• Substitute goods: positive value of XED
• Complementary goods: negative value of XED
• The absolute value of XED depends on the closeness of the relationship between the two goods. (Two goods are unrelated if XED =0)

Applications of cross price elasticity of demand

Applications of XED:

1. Firms on substitutes goods: low positive value?the better?increase price of the product
2. Firms on complementary goods: high negative value?the better?increase price of the product