Concept Of Cross Elasticity Of Demand And Its Types

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Concept Of Cross Elasticity Of Demand

Cross elasticity of demand is the relation between the percentage change in demand for a commodity to the percentage change in the price of related commodity. The cross elasticity of demand between good A and B is :



Cross elasticity (exy) = % change in quantity demanded for A good / % change to price of B good.

Types Of Cross Elasticity Of Demand
Theoretically, there are two types of cross elasticity of demand:

1. Positive Cross Elasticity Of Demand (exy>0)
In the case of substitute goods, the cross elasticity of demand is positive. If the price of tea rises, it will lead to increase in the demand for coffee. Similarly, a fall in price of tea will cause a decrease in the demand for coffee.

2. Negative Cross Elasticity Of Demand (exy<0 comment-0--="">
In the case of complementary goods, cross elasticity of demand is negative. If the price of car rises, it will lead to decrease in the demand for petrol. Similarly, the fall in the price of car will bring the increase in the demand for petrol. Since, the price and demand change in opposite direction, the cross elasticity of demand is negative.

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