Cross-Price Elasticity of Demand
Cross-price elasticity of demand is a measure of consumers responsiveness in demand for a product when the price of a related product changes. This formula determines whether goods are substitutes, complements or unrelated goods. In order to find this figure, you must INCLUDE negative values into the formula.
Complementary goods describe products that are bought together, for instance, socks are commonly bought with sneakers. These goods have an inverse relationship, meaning, if the price rises for one good, the demand will fall for both goods.
Substitute goods are alternatives for each other. These goods have a positive relationship. For instance, if the price rises for orange juice, consumers can choose to purchase apple juice instead, therefore, raising the demand for apple juice.
XED outcomes and factors
The table above shows how the XED formula can be used to identify the elasticity and relationship between different types of goods. This data is important for businesses as firms need to change their prices to meet the price levels of complementary goods to beat the prices of competitors.
(Tip: The table and the timeline show the same data! Be sure to study the format that is easiest to remember - I like the number line.)