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Cross elasticity of demand

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Cross elasticity of demand (XED) - definition

Cross elasticity of demand refers to the responsiveness of demand for one good (X) to a change in the prices of a related good (Y). Shown by:

% Change in quantity demanded (X)
% Change in price (Y)

Hence, if the price of a smartphone Y increases from £400 to £440 (a 10% increase), and demand increases from 2m a year to 3m (a 50% rise) for smartphone X, XED for smartphones X and Y would be:

+50
+10

Which gives an XED value of (+) 5. The positive sign shows that price of Y and quantity demanded of X are positively related, which indicates they are substitutes, and the value (5) is greater than 1, which means the XED for smartphones X and Y is elastic and they are close substitutes.




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