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:
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.