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What does the cross price elasticity of demand mean, in words?
What does the cross price elasticity of demand mean, in words?
Expert Solution
The cross-price elasticity of demand is a measure of responsiveness in the demand of one product to the changes in the price of another related product. It found by dividing the change in the demand for a product by the change in the price of another product.
Looking at the formula, if the demand for one product increases when the price of another increases, we would get a positive cross-price elasticity of demand. Thus, substitute products have a positive cross-price elasticity of demand.
On the other hand, if the demand for one product increases when the price of another decreases, we would get a negative result. Thus, complementary products have a positive cross-price elasticity of demand.
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