Cross Elasticity (XED) Calculator
Responsiveness of demand for one good to a price change of another.
Formula first
Overview
Cross Elasticity of Demand (XED) measures the responsiveness of the quantity demanded for one good to a change in the price of another good. It is a fundamental metric used to classify the relationship between two products as substitutes, complements, or independent of one another.
Symbols
Variables
XED = XED, \%\Delta QD_A = %Δ Q Good A, \%\Delta P_B = %Δ P Good B
Apply it well
When To Use
When to use: Apply this formula when analyzing how a competitor's pricing strategy impacts your sales volume or how the cost of a primary good affects its accessories. It assumes a ceteris paribus environment where consumer income and the price of the product itself remain constant.
Why it matters: This metric helps firms identify their closest competitors and plan production based on shifts in related markets. For regulators, it is a critical tool for defining market boundaries and determining if a merger might lead to a monopoly by reducing consumer alternatives.
Avoid these traps
Common Mistakes
- Swapping the goods in the formula.
One free problem
Practice Problem
A local coffee shop observes that when the price of tea (Good B) increases by 10%, the quantity demanded for their coffee (Good A) increases by 5%. Calculate the Cross Elasticity of Demand.
Solve for:
Hint: Divide the percentage change in demand for coffee by the percentage change in the price of tea.
The full worked solution stays in the interactive walkthrough.
References
Sources
- Mankiw, N. Gregory. Principles of Economics.
- Sloman, John, et al. Economics.
- Wikipedia: Cross elasticity of demand
- Mankiw, N. Gregory. Principles of Economics. 9th ed. Cengage Learning, 2021.
- McConnell, Campbell R., Stanley L. Brue, and Sean M. Flynn. Economics: Principles, Problems, and Policies. 23rd ed.
- A-Level Economics — Elasticities