Definition
Cross Elasticity of Demand
Cross elasticity of demand measures how the demand for one good changes when the price of another changes, identifying substitutes (positive) and complements (negative).
If the price of tea rises and coffee demand goes up, they are substitutes (positive cross elasticity). If a rise in petrol prices cuts demand for cars, they are complements (negative cross elasticity).
Companies and regulators use cross elasticity to understand competition and pricing power. In India, the cross elasticity between, say, CNG and petrol cars or between branded and unbranded goods shapes how firms set prices and how policy changes ripple through related markets.
Related terms
- Income Elasticity of DemandIncome elasticity of demand measures how demand for a good changes as consumer incomes change, distinguishing normal goods, luxuries and inferior goods.
- Monopolistic CompetitionMonopolistic competition is a market with many firms selling differentiated products, each with some pricing power from branding but facing easy entry that erodes long-run profits.
- Substitution EffectThe substitution effect is the change in how much of a good people buy when its price changes and they switch toward relatively cheaper alternatives, holding real income constant.
- Price Elasticity of DemandPrice elasticity of demand measures how sharply the quantity people buy responds to a change in price; elastic goods react strongly, inelastic ones barely react.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.