Cross-Price Elasticity

Cross-price elasticity is defined as the percentage change in demand on a good if the price of another good changes with one percent:

Here, e₁₂ is the cross-price elasticity between good 1 and good 2; Q₁ and ΔQ₁ are quantity demanded and quantity change for good 1, whereas p₂ and Δp₂ are price and price change on good 2. Again, goods are grouped depending on their cross-price elasticity.

Suppose the price of good 2 rises by one percent. If that leads to a decrease in the demand for good 1 (e₁₂ < 0) then good 1 and good 2 are probably goods that go together in some way: complements. If, instead, it leads to an increase in the demand for good 1 (0 < e₁₂) then good 1 is probably something one can buy instead of good 2: a substitute.

To get more help in Cross-Price Elasticity click the button below to submit your homework assignment