Define the term cross price elasticity of demand and clearly explain its value for substitutes and complementary commodities

Define the term cross price elasticity of demand and clearly explain its value for substitutes and
complementary commodities

Cross price elasticity of demand is defined as a measure of the degree of the responsiveness of the
quantity demanded of one commodity to changes in price of another related commodity, which is
either a substitute or complementary good.
It?s given by dividing the proportionate or percentage change in quantity demanded of
one commodity by the proportionate or percentage change in price of another related commodity
such that:


Cross elasticity of demand is positive and negative for substitutes and complementary goods respectively.

It is positive for substitutes since they are used alternatively such that an increase in price of one causes an increase in the quantity demanded of the other, that is, the quantity demanded of one is an increasing function of the price of the other eg. tea and coffee.

Fig 9.1: Substitutes

An increase in price of tea from P1 to P2 increases the quantity of coffee demanded from q1 to q2.
Cross elasticity of demand is negative for complementary goods since they are used jointly/together such that the quantity demanded of one (eg. petrol) is a decreasing function of the price of the other (eg cars)

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Wilfykil answered the question on February 4, 2019 at 12:56

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