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Cross price elasticity of demand (XED)

Cross elasticity of demand is

the effect on the change in demand of one good as a result of a change in price of related to another product.

In economics, it is denoted by the symbol XED.

The formula for cross elasticity of demand is

Cross elasticity of demand =
% change in quantity demanded of good X
% Change in price of good Y

In XED it is important to have the positive/negative sign in front of the value.

If the value of XED is positive, this means that the two goods being considered are substitute goods.

Close substitutes have high positive value. Example: butter and margarine.

If two goods are complements, an increase in the price of one will lead to a reduction in the demand for the other—the XED is negative.

Very close complements have a lower negative value.

If two goods are unrelated, a change in the price of one will not affect the demand for the other—the XED is zero.

 

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