“The cross elasticity of demand is the proportional change in the quantity of X good demanded resulting from a given relative change in the price of a related good Y” Ferguson
It measures the percentage change in the quantity demanded of commodity X to the percentage change in the price of its substitute/complement Y
Formula – Proportionate change in quantity demanded of X/ Proportionate change in the price of Y
Types
- Positive – When goods are substitute of each other then cross elasticity of demand is positive. In other words, when an increase in the price of Y leads to an increase in the demand of X. For instance, with the increase in price of tea, demand of coffee will increase.
In the above figure, at price OP of Y-commodity, demand of X-commodity is OM. Now as price of Y commodity increases to OP1 demand of X-commodity increases to OM1 Thus, it is positive.
2. Negative – A proportionate increase in price of one commodity leads to a proportionate fall in the demand of another commodity because both are demanded jointly refers to negative cross elasticity of demand.
When the price of commodity increases from OP to OP1 quantity demanded falls from OM to OM1. Thus, cross elasticity is negative.
3. Zero – Cross elasticity of demand is zero when two goods are not related to each other. For instance, increase in price of car does not effect the demand of cloth. Thus, cross elasticity is zero.
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