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:


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


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BREAKING DOWN '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.

  1. Substitute

    A product or service that a consumer sees as comparable. If prices ...
  2. Demand Elasticity

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

    In economics, the demand schedule is a table of the quantity ...
  4. Macroeconomics

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

    A measure of a variable's sensitivity to a change in another ...
  6. Microeconomics

    The branch of economics that analyzes the market behavior of ...
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