Cross-price Elasticity of

Demand
Unit 3 - Lesson 4

Learning outcomes
Outline the concept of Cross-price Elasticity of Demand.
Calculate XED.
Show that substitute goods have a positive value &
complementary goods have negative XED.
Explain the value of XED depends on the closeness of
the relationship between the two goods.
Examine the implication of XED for businesses if price
changes.

Cross-price Elasticity of Demand

measures the responsiveness of consumers
of one good to a change in price of a related
good.

XED tells us...

If two goods are complements or substitutes.

When the price of Complement Good A falls,

XED tells us how much Demand for Good B will
increase.

Formula.
Yes, you must know this..
XED = % change Quantity (A)
% change Price (B)

Try this.
The price of charcoal rises from $10 - $13, the
quantity of charcoal barbeques sold falls from
55 - 50.
Calculate the XED...

Steps.
% Change Price Charcoal: XED = %Change Q(A)
%Change P(B)
$13 - $10 .33 or 33%
$10
XED = -20%
33%
% Change Quantity BBQ:
XED = - 0.3
50 - 55
- .20 or -20%
55

What does this mean?

What we know:
Complements: An increase in Price(A) leads
to a decrease in Demand for (B). There is an
inverse relationship...negative relationship.
Substitutes: An increase in Price(A) leads to
an increase in Demand for (B). There is a
direct relationship...positive relationship.

So...
When the XED is negative:
The two goods are Complementary.
An increase in the Price of charcoal leads to a
decrease in the demand for BBQs.
So a 1% increase in the price of charcoal leads
to a .3% decrease in Demand for BBQ.

Try this...
The price of chicken rises from $5 - $6, the
quantity of beef sold increases from 100 - 125
tons.
Calculate the XED...

Work...
%Change P (chicken):
$6 - $5 .2 = 20%
$5
%Change Q (beef):
125 - 100 .25= 25%
100

XED = 25%
20%
XED = 1.25
Notice the coefficient is
positive.

What doe it mean?

When XED is positive, the goods are said to
be substitute goods.
An increase in the price of chicken leads to a
increase in Demand for beef.
So, a 1% increase in the price of chicken leads
to a 1.25% decrease in demand for beef.

Elastic or Inelastic XED

Similar to PED, XED states:
XED < 1 : Goods are cross-price inelastic.
XED > 1 : Goods are cross-price elastic.