Cross Price Elasticity of Demand Formula

The cross price elasticity of demand refers to  how responsive or elastic the demand for one product is with the response to the change in price of another product. In other words, the cross price elasticity of demand tracks the relationship between price and demand.

By calculating cross price elasticity, it can be determined if the products are substitutes, complements, or are not related to each other.

In such a situation, if the products are substitutes of each other, then a positive cross elasticity of demand is observed, while if the products are complements of each other, then a negative cross elasticity of demand is observed.

Industry and business owners use this information for determining the price for certain products.

The cross price elasticity of demand formula is expressed as follows:

Cross price elasticity of demand (XED) = (∆QX/QX) ÷ (∆PY/PY)

Where,

QX = Quantity of product X

PY = Price of the product

∆ = Change in the quantity demanded/price

From this formula, the following can be deduced.

If XED > 0, then the products are substitutes of each other.

If XED < 0, then the products are complements of each other

If XED = 0, then the products are not related to each other.

This concept was about the cross price elasticity of demand. To read about more of such interesting concepts on economics for Class 12, stay tuned to BYJU’S.

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