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Explaining cross price elasticity of demand

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What is cross-price elasticity? Explain why the results of calculating cross-price elasticity can be useful in determining product relationships. In your explanation, contrast the different numerical values of cross-price elasticity and what each value indicates.

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Solution provides detailed explanation of the term cross price elasticity of demand. It also explains how is it useful to managers for decision making. Answer is in about 480 words.

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Cross-price is a measure of influence of a change in one good's price on the demand of another good. Cross-price elasticity of demand equal to the percent change in the demand of good A if the price of good B changes by 1%, assuming other variables are kept constant.

Cross-price elasticity of demand=% change in quantity demanded/ % change in Price of related good

Calculating cross price elasticity of demand between two products can help us to determine the relationship between two products i.e. whether two goods are substitutes or compliments. The cross-price elasticity of demand is used to see how sensitive the demand for a good is to a price change of another good. A positive value of cross-price elasticity tells us that if the price of ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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