What is cross-price elasticity of demand?
Cross-price elasticity of demand (CPEoD) is a measurement of how much a price change of one item will affect the demand of another item.
CPEoD is typically used for competitive products (if brand B reduces their price, demand for a brand A usually goes down) and complementary products (if the price of hamburgers goes down and people buy more hamburgers, they also buy more ketchup).
A CPEoD of more than 1 is considered to be very elastic. If the price of good #2 changes a little, it will affect the demand of good #1 a lot.
A CPEoD of 1 is considered unitary. If the price of good #2 changes 10%, it will affect the demand of good #1 by 10% as well.
A negative CPEoD means that if the price of good #2 falls, demand for good #1 will also fall.
Cross Price Elasticity of Demand = % Change in Demand of Good #1 / % Change in Price of Good #2
Sources and more resources
- Wikipedia – Cross elasticity of demand – An explanation of cross elasticity of demand. Includes charts and formulas.
- Khan Academy– Cross elasticity of demand – Part of a larger course on microeconomics. This video overviews the concept of cross elasticity.
- Investopedia – Cross elasticity of demand – A short explanation of cross elasticity of demand.