Cross elasticity of demand (XED)

Figure 1. How much is the

demand of ham affected by
the price of cheese?
Cross elasticity of demand is the next type of elasticity we're going to discuss.
In the previous sections, we defined PED, which is a measure of how sensitive the quantity
demanded is of a good, to changes in its own price, related to a movement along the demand curve.
Cross elasticity of demand (XED) is a measure of how the quantity demanded of a good is
responsive to changes in the price of another good.

Be Aware
Although PED had to do with a movement along the demand curve of a good, XED has to do with
how much the demand curve of a good shifts when the price of another good changes.
For example, XED is used to determine to what extent the demand for ham will change, if there is
a change in the price of cheese, as they are usually consumed together. Although in both cases the
demand for ham will increase (shift outwards) as the price of cheese decreases, because they are
complements, a greater (negative) XED will produce a greater demand shift than a smaller
(negative) XED value. This can be seen comparing Figures 2 and 3.

Figure 2. The effect of an increase in the price

of
cheese on the demand of ham (bigger XED).

Figure 3. The
effect of an increase in the price of cheese on the demand of ham
(smaller XED).

Definition
Cross elasticity of demand is a measure of the responsiveness of the quantity demanded of a
good or service, to changes in the price of another good.
It is usually calculated by the following formula:

XED=% change in the quantity demanded of good X% change in the price of good YXED=% change in the
quantity demanded of good X% change in the price of good Y
The formula written in symbols is expressed as:

XED=%Qd of X%PyXED=%Qd of X%Py

In other words, this means that the cross elasticity of demand is the percentage change in the
quantity demanded of a good, divided by the percentage change in the price of another good.
If the price of ham increases by 10%, and this produces a fall in the demand of cheese of 7.5%, it is
said that the cross elasticity between ham and cheese is -0.75.
XED = % Qd cheese / % P of ham = -7.5% / 10% = -0.75

This means that for every 1% change in the price of ham, the quantity demanded of cheese will
change by 0.75%.
It is important to notice, that for this type of elasticity, the resulting sign has a meaning. In the
previous example of ham and cheese, as the goods are complements, the increase in the price of
one will produce a fall in the quantity demanded of the other, as they are many times consumed
together.

Be Aware
The sign of XED is now relevant as it reveals what the relationship between the goods in question
is.

Range of values of XED

XED relates the demand for a good with a change in one of the non-price determinants of demand,
the price of other goods.

Important
If XED > 0 (a positive value), then the goods are substitutes.
If XED < 0 (a negative value), then the goods are complements.
If XED = 0 , then the goods are unrelated.

If the value of XED is positive, then the two products in question may be said to be substitutes for each
other. Goods that are very close substitutes will have a higher positive value than those that are not so close.
For example, margarine and butter will have a lower positive XED than two brands of butter. The two brands of
butter are closer substitutes than margarine and butter.
If the value of XED is negative, then the two products in question may be said to be complements of each
other. Goods that are very close complements will have a higher negative value than those that are not so close.
For example, sausages and hot dog buns will probably have a higher negative XED than sausages and ketchup.
Sausages and hot dog buns are closer complements than sausages and ketchup, as hotdogs are made
from sausages and buns and people usually consume them together. However, people can use any other sauce
on sausages and hotdogs.
Table 1. XED values and the closeness between goods.

Values of XED

Relationship between
goods

High positive value

Close substitutes

A small increase in the price of one of the goods, will lead to

a great increase in the quantity demanded of the other good.

Low positive value

Remote substitutes

A small increase in the price of one of the goods, will lead to

What does it mean?

a small increase in the quantity demanded of the other good.

XED = 0

Unrelated goods

Any change in the price of one of the goods, will lead

to no change in the quantity demanded of the other good.

Low negative value

Remote complements

High negative value

Close complements

A small increase in price of one of the goods, will lead to a small

fall in the quantity demanded of the other good.
A small increase in the price of one of the goods, will lead to
a great fall in the quantity demanded of the other good.

Try for yourself!

A sport-shoe store decides to sell its tennis shoes at $210 a pair instead of $280, its running shoes
at $330 instead of $300, and reduce the price of tennis socks from $25 a pair to $20.
After a month, its sales varied as follows: tennis shoes have increased from 1000 pairs to 1,500;
running shoes sales fell from 960 to 840; and sock sales have increased from 2,400 pairs to 2,640 a
month.

a) Calculate the cross elasticity of demand of tennis shoes and running shoes. Interpret the value.
b) Calculate the cross elasticity of demand of tennis socks and tennis shoes. Interpret the value.
+ Show answer