What is cross elasticity

Answer 1

Hello Angela,

"Cross elasticity" is usually discussed in the context of price elasticity of demand, and it refers to the change in quantity demanded of one good when the price of another good changes.

Cross [price] elasticity of demand can be either positive or negative.

Positive cross elasticity indicates that two goods are substitutes - if the price of good A increases, the quantity demanded of good B will increase if B is a substitute for A. For example, if you think Coke and Pepsi are substitutes, an increase in the price of Coke will likely increase demand for Pepsi.

Negative cross elasticity indicates that two goods may be related/complementary goods - if the price of good A increases, quantity demanded of good B may decrease if A and B are complementary. An example might be a printer and printer ink - if the price of one of those increases then the quantity demanded of the other is likely to decrease.

I hope this is helpful.

-Josh