Cross Elasticity of Demand
The responsiveness of quantity demanded to changes in the price of
another product is called the cross elasticity of demand It is denoted
and defined as follows:
The change in the price of good Y causes the demand curve for good X
shift. If X and Y are substitutes, an increase in the price of Y leads to an
increase in the demand for X. If X and Y are complements, an increase in
the price of Y leads to a reduction in demand for X. In either case, we are
holding the price of X constant. We therefore measure the change in the
quantity demanded of X (at its unchanged price) by measuring the shift of
the demand curve for X.
Cross elasticity can vary from minus infinity to plus infinity.
Complementary products, such as cars and gasoline, have negative cross
elasticities. A rise in the price of gasoline will lead to a decline in the
demand for cars, as some people decide to do without a car and others
decide not to buy an additional car. Substitute products, such as cars and
public transport, have positive cross elasticities. A rise in the price of cars
will lead to a rise in the demand for public transport as some people shift
from cars to public transport.
ηXY
ηXY=PercentagePercentagechangechangeinquantityinpricedemandedofgoodofYgoodX