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Cross price elasticity of demand

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The cross-price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity due to the change in price of another commodity.

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Cross price elasticity of demand

  1. 1. CROSS PRICE ELASTICITY OF DEMAND
  2. 2. Definition The cross-price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity due to the change in price of another commodity.
  3. 3. In other words Income Elasticity of Demand measures by how much the quantity demanded changes with respect to the change in income.
  4. 4. Mathematical Expression
  5. 5. Practical Example Tea and coffee are substitutes to each other. If the price of coffee rises from Rs.10 per 100 grams to Rs.15 per 100 grams. As a reserve, consumer demand for tea increases from 30/100 grams to 40/100 grams. Find out the cross elasticity of demand between tea and coffee.
  6. 6. Solution Here, If we suppose tea as good x and coffee as good y. The coefficient of cross elasticity is 2/3 which shows that the quantity demanded for tea increases 2% when the price of coffee rises by 3%.
  7. 7. Types of Cross Elasticity of Demand 1. Positive cross elasticity of demand (EC>0) 2. Negative cross elasticity of demand (EC<0)
  8. 8. Positive cross elasticity of demand (EC>0) Rise in price of one good leads to rise in quantity demanded of other good of a similar nature and vice versa
  9. 9. Negative cross elasticity of demand (EC<0) Rise in price of one good leads to fall in quantity demanded of its complementary good and vice versa
  10. 10. • To learn more visit businesstopia.net/economics • To get more resources related to Business Studies join the facebook group Fb.com/groups/businessnotes

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