Cross Price Elasticity
Economists may like to know how responsive/elastic the quantity demanded for a good is in response to a change in the price of another good. For example, if the price of CD players decreases, what will happen to the quantity demanded for CDs? Well, we can imagine that more CDs will be bought/demanded to go along with people's CD players. E = change in quantity demanded of good A
By calculating cross-price elasticity, we can measure the responsiveness and determine if the goods are substitutes, compliments, or not related to each other.
The cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good when compared with a change in the price of another good.
change in price of good B
Characterizing Cross-Price Elasticity
Substitutes (E>0). Are goods that can be used in exchange for one another. For instance, if the price of Pepsi were to increase, the demand for Coca Cola would increase because people generally see these two goods as substitutes for one another.
Compliments (E<0). Are goods that people tend to consume hand in hand. For example, if the price of hamburger meat increases, the demand for American Cheese will decrease. This is because people commonly use American Cheese to make cheeseburgers.
Independent (E=0). These are goods that show no relationship. An example of independant goods is Halloween costumes and marble flooring.
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