Cross-Price Elasticity of Demand Calculator
Cross-price elasticity of demand (XED) quantifies how the quantity demanded of one good changes in response to a price change in a different good.
Formula first
Overview
A positive XED indicates that two goods are substitutes, as an increase in the price of one leads to an increase in the demand for the other. Conversely, a negative XED identifies complementary goods, where a rise in the price of one reduces the demand for its complement. This metric is essential for firms assessing market competition and portfolio strategy.
Symbols
Variables
XED = Cross-Price Elasticity of Demand, % = Percentage Change in Quantity of X, % = Percentage Change in Price of Y
Apply it well
When To Use
When to use: Apply this when determining the competitive relationship between two goods or analyzing the impact of pricing strategy on a related product line.
Why it matters: It allows businesses and policymakers to understand how price shocks in one sector—such as gasoline—propagate to demand in related sectors, like electric vehicles or public transit.
Avoid these traps
Common Mistakes
- Confusing cross-price elasticity with own-price elasticity of demand.
- Assuming a result of zero implies no relationship when it could imply unrelated goods.
One free problem
Practice Problem
If the price of Good Y increases by 10% and the quantity demanded of Good X increases by 5%, what is the cross-price elasticity?
Solve for: XED
Hint: Divide the percentage change in quantity of X by the percentage change in price of Y.
The full worked solution stays in the interactive walkthrough.
References
Sources
- Mankiw, N. G. (2020). Principles of Economics (9th ed.). Cengage Learning.
- Pindyck, R. S., & Rubinfeld, D. L. (2017). Microeconomics (9th ed.). Pearson.
- Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach (9th ed.). W. W. Norton & Company.