Published May 15, 2023 Cross elasticity of demand (also known as cross price elasticity) is a measure of the responsiveness of the demand for one product to changes in the price of a related product. It is represented by the percentage change in quantity demanded for a product divided by the percentage change in the price of a related product. It helps to determine whether the two products are complements (products that are consumed together) or substitutes (products that can be replaced by each other). To illustrate the cross price elasticity, consider the market for coffee and tea. If the price of coffee increases, consumers may start to substitute it with tea, assuming that the price of tea remains constant. As a result, we can expect the demand for tea to increase and the cross elasticity of demand between coffee and tea to be positive. Similarly, if the price of tea increases, we can expect the demand for coffee to increase as consumers switch from tea to coffee. On the other hand, if two products are complements, a change in the price of one product may affect the demand for the other product, but in the opposite direction. For example, if the price of coffee increases, we may expect the demand for coffee filters to decrease, as consumers will be purchasing less coffee. Hence, the cross price elasticity between coffee and coffee filters will be negative. Cross elasticity of demand is an essential tool for businesses to determine their product pricing strategies. It helps companies to understand how their product prices affect the demand for their products and the demand for their competitors’ products. Companies can use this knowledge to make informed decisions about pricing their products and also to determine the best time to launch new products. It can also assist businesses in making decisions about marketing campaigns, promotional activities, and other strategies for increasing sales or market share.Definition of Cross Elasticity of Demand
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Why Cross Elasticity of Demand Matters
Microeconomics