Cross elasticity of demand measures how the quantity demanded of one good changes in response to a change in the price of another good. It helps to determine if two goods are complementary or substitute goods.
To calculate cross elasticity of demand, you use the following formula:
Cross Elasticity of Demand = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B)
For example, let's consider two goods: coffee and sugar. If the price of coffee increases by 10% and the quantity demanded of sugar increases by 5%, the cross elasticity of demand would be:
Cross Elasticity of Demand = (5%) / (10%) = 0.5
If the cross elasticity of demand is positive, the goods are considered to be substitutes, as an increase in the price of one good leads to an increase in the demand for the other. If the cross elasticity of demand is negative, the goods are considered to be complements, as an increase in the price of one good leads to a decrease in the demand for the other.
Explain how to find a cross elasticity of demand with an example and how do you tell whether the good is complementary good or substitute good
1 answer