**What is cross price elasticity of demand (XED)?**** **

Cross price elasticity of demand is the figure which denotes the relationship between two goods.

**How do economists calculate Cross price elasticity of demand?**

**XED = Percentage change in quantity demanded of good A / percentage change in the price of good B**

*Percentage change in quantity demanded of good A (divided by) percentage change in*

*the price of good B*

**How do we interpret cross price elasticity of demand values?**

**Negative value = complements**

If the value is greater than -1 than they are strong complements and if they are less than -1 they are weak complements.

**‘0’**(

*zero*)

**value**=

**independent good**s (they have no value)

**Positive value = substitutes**

If the value is greater than 1 then they are strong substitutes and if they are smaller than 1 they are weak substitutes

**TEST YOURSELF!**

*(Answers found below)*

Q1: What type of relationship is there between two goods, X and Y, given that:

– Original price of good X =80

– Original quantity of good Y = 50

– Final price of good Y=40

– Final quantity of good Y = 40

– Original price of good Y = 5

Q2: For each of the following product pairs what would you guess about the cross price elasticity of demand? What are their relationships? Do they have a strong or weak relationship?

a) Shoes and sneakers

b) Gasoline and sports utility vehicles

c) Bread and butter

d)Instand camera film and regular camera film

**ANSWERS!**

Q1: XED = % change in QD of good Y / % change in P of good X

= [(40-50)/50] * 100 / [(80-40)/80] * 100

= (-10/50 ) * 100 / (-40/80) * 100

= -0.2 * 1o0 / -0.5 * 100

= -20/-50

= +0.4

Therefore they are weak substitutes

Q2: (a) Weak substitues – positive value for XED

*which is less than 1*(b) Strong complements – negative value for XED

*which is greater than -1*(c) Strong complements – negative value for XED

*which is greater than -1*(d) Strong substitues – positive value for XED

*which is greater than 1*