- Types of Markets in Economics
- Demand Function and Demand Curve
- Supply Function and Supply Curve
- Shifts in Demand and Supply Curves
- Aggregating Demand and Supply Curves and Concept of Equilibrium
- Excess Demand and Excess Supply
- Stable and Unstable Equilibrium
- Types of Auctions
- Four Methods of Distributing Government Securities
- Consumer and Producer Surplus
- Effects of Government Regulation on Demand and Supply
- Price Elasticity of Demand
- Income Elasticity of Demand
- Cross Price Elasticity of Demand
Cross Price Elasticity of Demand
Cross price elasticity of demand refers to the responsiveness of demand of one good to changes in the price of a related good (either a substitute or a complementary product).
The above equation calculates the price elasticity of demand for good y for a change in price of good x.
For complementary products, cross price elasticity will have negative sign, signifying an inverse relationship between the two. So, when the price of a complementary product rises, the demand for the product itself decreases.
For a substitute, cross price elasticity will have a positive sign, signifying a positive relationship between the two. So, when the price of a substitute product rises, the demand for the product itself increases.
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