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CROSS PRICE ELASTICITY OF DEMAND

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Definition:
Cross price elasticity of demand refers to the percentage change in the quantity demanded of a given product due to the percentage change in the price of another "related" product. If all prices are allowed to vary, the quantity demanded of product X is dependent not only on its own price (see elasticity of demand) but upon the prices of other products as well.

Context:
The concept of cross price elasticity of demand is used to classify whether or not products are "substitutes" or "complements". It is also used in market definition to group products that are likely to compete with one another. If an increase in the price of product Y results in an increase in the quantity demanded of X (while the price of X is held constant), then products X and Y are viewed as being substitutes. For example, such may be the case of electricity vs. natural gas used in home heating or consumption of pork vs. beef.

The cross price elasticity measure is a positive number varying from zero (no substitutes) to any positive number. Generally speaking, a number exceeding two would indicate the relevant products being "close" substitutes.

If the increase in price of Y results in a decrease in the quantity demanded of product X (while the price of X is held constant), then the products X and Y are considered complements. Such may be the case with shoes and shoe laces.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.

Cross References:
Elasticity of demand (price)

Hyperlink:
http://www.oecd.org/dataoecd/8/61/2376087.pdf

Statistical Theme: Financial statistics

Created on Thursday, January 03, 2002

Last updated on Monday, March 03, 2003