Cross-price elasticity of demand, Microeconomics

Cross-Price Elasticity of Demand is explained below:

Cross price elasticity of the demand is the percentage change in the quantity demanded of a particular good, with respect to the percentage change in price of another related good.

 

Pb?da = Percentage change in Demand for good a

               Percentage change in Price of good b

If, for instance, the demand for the butter rose by 2% when the cost of the margarine rose by 8%, then the cross cost elasticity of demand of butter with respect to price of margarine will be as follows.

 

Pb?da = 2% = 0.25

   8%

If, on the other hand, the price of bread (a compliment) rose, the demand for butter would decrease. If a 4% rise in price of bread led to a 3% fall in the demand for butter, the cross-price elasticity of demand for butter with respect to bread would become:

Pb?da = - 3% = - 0.75

   4%

 

Posted Date: 7/19/2012 4:00:07 AM | Location : United States







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