Next video:
Loading the player...

Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.

If two goods can be substituted for one another, consumers will usually buy one when the price of another increases.

For example, if the price of butter increases and everything else stays the same, the demand for margarine is likely to grow as consumers try a substitute.

Calculate the cross elasticity of demand by taking the percentage of change in the quantity demanded of one good and dividing it by the percentage of change in price of a substitute.

Positive cross elasticity means that if the price of one good goes up, demand for another does, too. The butter and margarine example illustrates this concept.

With negative cross elasticity, an increase in the price of one good causes a drop in the demand for another. Complementary products demonstrate this concept. If the price of coffee increases and everything else stays the same, the quantity demanded for stir sticks will drop, too.

If the calculation yields a small value, then the two goods have little relation. Cross elasticity of demand really only applies in situations where the two products or services are related in some way. For instance, an increase in the price of shoes is likely to have little bearing on the demand for plastic cups.

Related Articles
  1. Insights

    How Demand Changes With a Variation in Price

    What is demand elasticity?
  2. Investing

    Price Elasticity Of Demand

    Price elasticity of demand describes how changes in the cost of a product or service affect a company's revenue.
  3. Insights

    What Is Elasticity?

    Elasticity measures the relationship between a good and its price based on consumer demand, consumer income, and its available supply. Learn the basics about it here.
  4. Insights

    Why We Splurge When Times Are Good

    The concept of elasticity of demand is part of every purchase you make. Find out how it works.
  5. Investing

    The Debt Report: The Consumer Staples Sector

    Learn about the improving stock performance and rising debt-to-asset ratios in the United States blue-chip consumer staples sector.
  6. Trading

    Make The Currency Cross Your Boss

    Tap into a world of possibilities by going beyond the simple pro- or anti-dollar trade.
  7. Investing

    Forex Investing: How To Use The Golden Cross

    Many currency traders know about the golden cross, but most don't utilize it. Learn how you can profit from this FX trend indicator.
Hot Definitions
  1. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  2. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  3. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  4. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  6. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
Trading Center