Cross Elasticity Of Demand

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.



comments powered by Disqus
Hot Definitions
  1. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
  2. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
  3. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
  4. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  5. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  6. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
Trading Center