What is the usefulness of the cross price elasticity of demand?
In case the two goods are substitutes for each other like tea and coffee, the cross price elasticity will be positive, i.e. if the price of coffee increases, the demand for tea increases. On the other hand, in case the goods are complementary in nature like pen and ink, then the cross elasticity will be negative, i.e. demand for ink will decrease if prices of pen increase or vice-versa.
The measure of responsiveness of the demand for a good towards the
change in the price of a related good is called cross price
elasticity of demand. It is always measured in percentage
terms.
With the consumption behavior being related, the change in the
price of a related good leads to a change in the demand of another
good. Related goods are of two kinds, i.e. substitutes and
complementary goods. In case the two goods are not related, the
Coefficient of Cross Elasticity is zero.
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