Cross Elasticity Of Demand

AAA

DEFINITION of 'Cross Elasticity Of Demand'

An economic concept that measures the responsiveness in the quantity demand of one good when a change in price takes place in another good. The measure is calculated by taking the percentage change in the quantity demanded of one good, divided by the percentage change in price of the substitute good:

Cross Elasticity Of Demand



Cross elasticity of demand is synonomous to "cross price elasticity of demand".

INVESTOPEDIA EXPLAINS 'Cross Elasticity Of Demand'

The cross elasticity of demand for substitute goods will always be positive, because the demand for one good will increase if the price for the other good increases. For example, if the price of coffee increases (but everything else stays the same), the quantity demanded for tea (a substitute beverage) will increase as consumers switch to an alternative.

On the other hand, the coefficient for compliments will be negative. For example, if the price of coffee increases (but everything else stays the same), the quantity demanded for coffee stir sticks will drop as consumers will purchase fewer sticks. If the coefficient is 0, then the two goods are not related.

RELATED TERMS
  1. Demand Elasticity

    In economics, the demand elasticity refers to how sensitive the ...
  2. Demand Schedule

    In economics, the demand schedule is a table of the quantity ...
  3. Microeconomics

    The branch of economics that analyzes the market behavior of ...
  4. Price Elasticity Of Demand

    A measure of the relationship between a change in the quantity ...
  5. Macroeconomics

    The field of economics that studies the behavior of the aggregate ...
  6. Elasticity

    A measure of a variable's sensitivity to a change in another ...
Related Articles
  1. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  2. Economics

    Understanding Supply-Side Economics

    Does the amount of goods and services produced set the pace for economic growth? Here are the arguments.
  3. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  4. Economics

    What Is The Labor Market Conundrum?

    We are facing a conundrum with investment implications: Why are wages still stagnant, when jobs are being created at the fastest pace since the late 90's?
  5. Economics

    Understanding Impairment

    In finance and accounting, impairment refers to the loss of value of a company’s capital stock.
  6. Economics

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.
  7. Economics

    What is a Promissory Note?

    A written promise by one party to pay another party a definite sum of money either on demand or at a specified future date.
  8. Savings

    How Microeconomics Affects Everyday Life

    Microeconomics is the study of how individuals and businesses make decisions to maximize satisfaction. Microeconomic principles can describe many everyday experiences. We use renting a New York ...
  9. Personal Finance

    Why Are Tesla Cars So Expensive?

    What makes Tesla cars so expensive? Short supply and pricey parts is a good place to start.
  10. Fundamental Analysis

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.

You May Also Like

Hot Definitions
  1. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  2. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  3. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  4. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  5. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  6. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
Trading Center