Cross-Price Elasticity Of Demand Definition & Examples

Published Dec 26, 2022

Definition of Cross-Price Elasticity of Demand

The Cross-Price Elasticity of Demand is a measure of how the demand for one good changes when the price of another good changes. It is calculated as the percentage change in the quantity demanded of the first good, divided by the percentage change in the price of the second good.

Example

To illustrate this, let’s look at the demand for apples and oranges. Imagine the price of oranges increases by 10%. How does this affect the demand for apples? If the demand for apples increases as well, then the cross-price elasticity of demand is positive. On the other hand, if the demand for apples decreases, then the cross-price elasticity of demand is negative.

Why Cross-Price Elasticity of Demand Matters

The Cross-Price Elasticity of Demand is an important concept for understanding the relationship between two goods. It helps businesses to understand how changes in the price of one good can affect the demand for another. This knowledge can be used to make better pricing decisions and to identify potential opportunities for product bundling.

In addition, the Cross-Price Elasticity of Demand is also important for understanding the effects of government policies. For example, if the government increases the price of one good, it can have a significant impact on the demand for related goods. Thus, understanding the Cross-Price Elasticity of Demand can help governments to make better policy decisions.

Disclaimer: This definition was written by Quickbot, our artificial intelligence model trained to answer basic questions about economics. While the bot provides adequate and factually correct explanations in most cases, additional fact-checking is required. Use at your own risk.