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Introduction to Cross Elasticity of Demand

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Introduction to Cross Elasticity of Demand

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Hello students! Today we will explore an important concept in economics: Cross Elasticity of Demand. This concept helps us understand the relationship between the demand for one product and the price of another. Let’s dive in through a case study on coffee and tea in Vietnam!

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Price elasticity of demand is an economic measure of the change in the quantity demanded or purchased of a product in relation to its price change. Expressed mathematically, it is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
Price elasticity is used by economists to understand how supply or demand changes given changes in price to understand the workings of the real economy. For instance, some goods are very inelastic, that is, their prices do not change very much given changes in supply or demand, for example people need to buy gasoline to get to work or travel around the world, and so if oil prices rise, people will likely still buy just the same amount of gas. On the other hand, certain goods are very elastic, their price moves cause substantial changes in its demand or its supply. Here, we will look just at how the demand side of the equation is impacted by fluctuations in price by considering the price elasticity of demand - which you can contrast with price elasticity of supply.

If the quantity demanded of a product exhibits a large change in response to changes in its price, it is termed "elastic," that is, quantity stretched far from its prior point. If the quantity purchased has a small change in response to its price, it is termed "inelastic"; or quantity didn't stretch much from its prior point.

The more easily a shopper can substitute one product with a rising price for another, the more the price will fall - be "elastic." In other words, in a world where people equally like coffee and tea, if the price of coffee goes up, people will have no problem switching to tea, and so the demand for coffee will fall. This is because coffee and tea are considered good substitutes to each other.

The more discretionary a purchase is, the more its quantity will fall in response to price rises, that is, the higher the elasticity. So, if you are considering buying a new washing machine but the current one still works (it's just old and outdated), and if the prices of new washing machines goes up, you're likely to forgo that immediate purchase and wait either until prices go down or until the current machine breaks down.

On the other hand, the less discretionary a good is, the less its quantity demanded will fall. Inelastic examples include luxury items where shoppers "pay for the privilege" of buying a brand name, addictive products, and required add-on products. Addictive products may include tobacco and alcohol. Sin taxes on these types of products are possible to introduce because the lost tax revenue from fewer units sold is exceeded by the higher taxes on units still sold. Examples of add-on products are ink-jet printer cartridges or college textbooks. These items are usually more necessary (as opposed to discretionary) and lack good substitutes (only HP ink will work in HP printers).

Time also matters. Demand response to price fluctuations is different for a one-day sale than for a price change over a season or year. Clarity in time sensitivity is vital to understanding the price elasticity of demand and for comparing it across different products.

Generally as rules of thumb, if the quantity of a good demanded or purchased changes more than the price change, the product is termed elastic. (The price changes by +5%, but the demand falls by -10%). If the change in quantity purchased is the same as the price change (say, 10%/10% = 1), the product is said to have unit (or unitary) price elasticity. Finally, if the quantity purchased changes less than the price (say, -5% demanded for a +10% change in price), then the product is termed inelastic.

To calculate the elasticity of demand, let's take a very simple example: Suppose that the price of apples falls by 6% from $1.99 a bushel to $1.87 a bushel. In response, grocery shoppers increase their apple purchases by 20%. The elasticity of apples would thus be: 0.20/0.06 = 3.33 - indicating that apples are quite elastic in terms of their demand.

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Price elasticity of demand is an economic measure of the change in the quantity demanded or purchased of a product in relation to its price change. Expressed mathematically, it is: Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price Price elasticity is used by economists to understand how supply or demand changes given changes in price to understand the workings of the real economy.

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Cross Elasticity of Demand is calculated using the formula:

XED = % Change in Quantity Demanded of Product A / % Change in Price of Product B

The result can be positive, negative, or zero, helping us understand the relationship between two products.

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What Is Cross Elasticity of Demand?

The cross elasticity of demand is an economic concept that measures the responsiveness in the quantity demanded of one good when the price for another good changes. Also called cross-price elasticity of demand, this measurement is calculated by taking the percentage change in the quantity demanded of one good and dividing it by the percentage change in the price of the other good.

Key Takeaways

Cross Elasticity of Demand Formula

Understanding Cross Elasticity of Demand

In economics, the cross elasticity of demand refers to how sensitive the demand for a product is to changes in the price of another product.

Substitute Goods

The cross elasticity of demand for substitute goods is always positive because the demand for one good increases when the price for the substitute good increases. For example, if the price of coffee increases, the quantity demanded for tea (a substitute beverage) increases as consumers switch to a less expensive yet substitutable alternative. This is reflected in the cross elasticity of the demand formula, as both the numerator (percentage change in the demand of tea) and denominator (the price of coffee) show positive increases.

Items with a coefficient of 0 are unrelated items and are goods independent of each other. Items may be weak substitutes, in which the two products have a positive but low cross elasticity of demand. This is often the case for different product substitutes, such as tea versus coffee. Items that are strong substitutes have a higher cross-elasticity of demand. Consider different brands of tea; a price increase in one company's green tea has a higher impact on another company's green tea demand.

Complementary Goods

Alternatively, the cross elasticity of demand for complementary goods is negative. As the price for one item increases, an item closely associated with that item and necessary for its consumption decreases because the demand for the main good has also dropped.

For example, if the price of coffee increases, the quantity demanded for coffee stir sticks drops as consumers are drinking less coffee and need to purchase fewer sticks. In the formula, the numerator (quantity demanded of stir sticks) is negative and the denominator (the price of coffee) is positive. This results in a negative cross elasticity.

Usefulness of Cross Elasticity of Demand

Companies utilize the cross elasticity of demand to establish prices to sell their goods. Products with no substitutes have the ability to be sold at higher prices because there is no cross-elasticity of demand to consider. However, incremental price changes to goods with substitutes are analyzed to determine the appropriate level of demand desired and the associated price of the good.

Additionally, complementary goods are strategically priced based on the cross elasticity of demand. For example, printers may be sold at a loss with the understanding that the demand for future complementary goods, such as printer ink, should increase.

What Does the Cross Elasticity of Demand Measure?

Cross elasticity of demand evaluates the relationship between two products when the price in one of them changes. It shows the relative change in demand for one product as the price of the other rises or falls.

What Does a Positive Cross Elasticity of Demand Indicate?

A positive cross elasticity of demand means that the demand for good A will increase as the price of good B goes up. This means that goods A and B are good substitutes. so that if B gets more expensive, people are happy to switch to A. An example would be the price of milk. If whole milk goes up in price, people may switch to 2% milk. Likewise, if 2% milk rises in price instead, whole milk becomes more in demand.

What Does a Negative Cross Elasticity of Demand Indicate?

A negative cross elasticity of demand indicates that the demand for good A will decrease as the price of B goes up. This suggests that A and B are complementary goods, such as a printer and printer toner. If the price of the printer goes up, demand for it will drop. As a result of fewer printers being sold, less toner will also be sold.

How Does Cross Elasticity of Demand Differ From Demand Elasticity?

Cross elasticity looks at the proportional changes in demand among two goods. Demand elasticity (or price elasticity of demand) by itself looks at the change in demand of a single item as its price changes.

How Does Cross Elasticity of Demand Differ From the Cross Elasticity of Supply?

In contrast to changes in demand of two goods in response to prices, the cross elasticity of supply measures the proportional change in the quantity supplied or produced in relation to changes in the price of a good.

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Cross Price Elasticity: Definition, Formula for Calculation, and Example

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The cross elasticity of demand is an economic concept that measures the responsiveness in the quantity demanded of one good when the price for another good changes. Also called cross-price elasticity of demand, this measurement is calculated by taking the percentage change in the quantity demanded of one good and dividing it by the percentage change in the price of the other good.

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In Vietnam, coffee and tea are two popular beverages. Suppose we study the impact of coffee prices on tea demand. We will consider market data over the past six months.

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Beverages - Vietnam | Statista Market Forecast

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The Beverages Market in Vietnam is projected to grow by 10.26% (2024-2029) resulting in a market volume of US$1,422.00m in 2029.

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January: Coffee Price 50,000 VND/kg, Tea Demand 1000 kg
March: Coffee Price increased to 60,000 VND/kg (up 20%)
June: Tea Demand increased to 1100 kg (up 10%)

Apply the XED formula to calculate!

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XED = % Change in Tea Demand / % Change in Coffee Price
XED = 10% / 20% = 0.5

A positive result indicates coffee and tea are substitute products. When coffee prices rise, consumers switch to buying more tea.

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Price Elasticity: What It Is & How to Calculate It

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Been a while since economics class? Brush up on price elasticity, the formulas you need, and why it’s all so important for your business.

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An XED of 0.5 means:
1. Coffee and tea are substitute products.
2. The relationship is not very strong (since < 1).
3. When coffee prices rise by 1%, tea demand increases by 0.5%.

This reflects the strong coffee-drinking culture in Vietnam, but tea remains a considerable alternative choice.

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5 Factors That Influence Competition in Microeconomics

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Find out what influences competition in microeconomics and how perfect competition, monopoly, and oligopoly vary in their competitive characteristics.

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1. What is Cross Elasticity of Demand?
2. What is the formula for calculating XED?
3. In the case study, what is the XED between tea and coffee?
4. What does a positive, negative, or zero XED indicate about the relationship between two products?
5. Why is the XED between coffee and tea in Vietnam less than 1?
6. Provide another example of two products that might have a positive XED in Vietnam and explain why.

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The last few years have highlighted the importance of relationship-building and checking in with students on a regular basis.

For learning to happen, students need to see their identities valued. They need to feel safe physically and emotionally-and they need to feel a sense of connection to peers and adults. You can do that by creating space for students to tell their stories, learning about their lives outside of school, and creating rituals that cultivate belonging and connectedness.

To help you get to know your students, we've curated this list of 101 asset-based, inclusive questions. Most are open-ended questions, but you can also adapt them into a multiple-choice format.
Free PDF Download: Panorama's Full Check-Ins Question Bank
How to Use These Questions

If you are a district or school administrator focused on improving relationships and belonging campus-wide, we invite you to share this article with your teachers and staff. This is a great resource to include on district or school resource sites, Tier 1 resource hubs, or in staff newsletters.

If you are a teacher, practitioner, or instructional coach, feel free to borrow these questions to get to know your students in the classroom-virtually or in person! These questions are great for small group brain breaks, icebreaker games, morning meetings or morning circles, and advisory periods. Or, use them as conversation starters in a 1:1 setting.

Click on the following links to jump to a section:

Interests and Hobbies

1. What are your favorite hobbies?

2. In your free time, what do you like to do?

3. Have you volunteered in your community?

4. What was the hardest part of the past week for you?

5. What is your favorite book?

6. What is your favorite TV show?

17. What is your favorite flavor of ice cream?

18. What is your favorite thing to do over the weekends?

19. If you could travel anywhere in the world, where would it be?

20. What is your most frequently-used or favorite emoji?

21. What are three awesome things about yourself?

22. What is something people don't know about you that you wish they knew?

23. What is a unique talent you have?

24. What do you want to be when you grow up?

25. What is a big world problem that you would like to change?

26. What is your biggest dream or goal in life?

Relational and Social-Emotional Learning

27. What is your social-emotional learning superpower?

28. Which of the following traits do you think best describes you: funny, thoughtful, caring, or outgoing?

29. How do you most like to connect with your friends? Through social media, by talking over the phone or texting, or by meeting up in person?

30. What is one thing your teacher can do to get to know you better?

31. How can your teacher help you if you are feeling down?

32. What is one thing you want to know about your teacher?

33. What do you think is the most important quality for a teacher to have?

34. Who is an adult at school that you know you can count on?

35. Who is a friend at school that you know you can count on?

36. When you are stressed, what do you do to relax?

37. What makes you feel the most appreciated and understood?

38. How would your friends or a relative describe you?

39. What is something that you are thankful for?

Family and Cultural Background

40. Where do your family members work?

41. What does dinner time look like at your house?

42. What are some family items or artifacts that represent your culture and identity?

43. Which languages do you speak (even just a little bit)?

44. Who is someone in your family that you look up to?

45. What is a favorite memory you have with a family member?

46. What do you like most about your family?

47. What is a family tradition that you have?

48. Does your family have pets? If not, would you like to have a pet? What kind?

49. What is your favorite family recipe?

50. Do you have siblings? If not, would you want to have siblings or do you like being an only child?

Academic Strengths and Opportunities

51. What is your favorite subject and why?

52. What is your least favorite subject and why? What is the best way I can support you when we work on that subject?

53. What is one thing you think you do well as a student?

54. What is one thing you would like to do better as a student?

55. What do you like most about school?

56. What do you like least about school?

57. What is something you would really want to learn about at school?

58. Which of the following is your favorite way to learn: by talking with others, by listening, or by reading?

59. What would be your dream field trip?

60. Would you rather do schoolwork as a group or by yourself?

61. What is the best school project or lesson you can remember?

62. What is the best way I can support you outside of class?

63. How would you like to be recognized if you get a good grade on an assignment or project?

The Transition Back to School / First Day of School

64. What is one thing you are looking forward to this school year?

65. What is something you learned over the summer?

66. What is something you would really want to learn about this year?

67. What is one thing you would like your classmates or teacher to know about you this year?

68. What is one thing you want to know about your teacher(s) this year?

69. What was the best part of the past week for you?

70. What was the hardest part of the past week for you?

71. What can teachers or other adults at school do to better support you?

72. How much did you enjoy class today?

73. How included did you feel in class today?

74. What was your favorite part of class today?

Virtual Learning

75. What is the best part of virtual learning?

76. What is the most challenging part of virtual learning?

77. How is your internet connection at home?

78. Where do you do your school work?

79. What is something your teachers could do to improve virtual classroom time?

80. What is your favorite Zoom background?

81. How do you prefer to be communicated when learning online? By email, a messaging app, on a video call, or by phone?

82. When you take breaks from school at home, what do you like to do?

83. What is your favorite way to get in touch with your classmates and friends online?

84. What would help you feel more connected to your classmates and your school?

"Would You Rather" Icebreaker Questions

These questions can also be used between classmates to help students reconnect with one another, discover similarities, and learn new things about one another.

85. Would you rather read a book or watch a movie?

86. Would you rather eat pizza or ice cream?

87. Would you rather do a school project by yourself or with friends?

88. Would you rather play a video game or play outside?

89. Would you rather have a dog or a cat?

90. Would you rather have chocolate or vanilla?

91. Would you rather go to the beach or go camping?

92. Would you rather eat salty or sweet snacks for the rest of your life?

93. Would you rather win the lottery or be famous?

94. Would you rather dance or sing in front of a group of people?

95. Would you rather be the oldest sibling or the youngest sibling?

96. Would you rather give a presentation or write a long paper?

97. Would you rather do your homework or do chores?

98. Would you rather travel back in time or travel to the future?

99. Would you rather live in snow or rain for the rest of your life?

100. Would you rather be able to fly or be invisible as a superpower?

101. Would you rather live without Netflix or live without YouTube?
Download Panorama's Check-Ins Question Bank

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101 Inclusive Get-to-Know-You Questions for Students [+ PDF Download]

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Explore 101 inclusive "get-to-know-you" questions for students. Ask students about their family, interests, hobbies, academic & social-emotional strengths, learning preferences, and more.

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Understanding cross elasticity is crucial for businesses when setting prices. For example, if a company knows its product has a high positive cross elasticity with another product, it can strategically adjust prices to attract those looking for alternatives.

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Price Elasticity Pricing Strategy | Examples & Benefits

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What is the meaning and definition of a Price Elasticity Pricing Strategy and what are the Pros and Cons? See these 3 examples.

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Cross elasticity can influence whether companies decide to enter new markets. If there is a strong negative cross elasticity between its product and an existing competitor's, the company might compete in markets where its product is a substitute.

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1. cross elasticity of demand measures the effect of changes in the price of one good on the quantity demanded of another good

2. % change in quantity demanded of product A / % change in price of product B

3. XED = %10 / %20 = 0.5

4. For substitute goods, XED is positive because a rise in price of good B will lead to consumers switching to the substitute good A. For complementary goods, XED is negative because a rise in price of good B will lead to a fall in the demand of both good A and B. For unrelated goods, XED is zero.

5. They are substitute products, their relationship is not very strong

6. apple and banana, they are substitute products so XED must be positive

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1. What is Cross Elasticity of Demand?

Cross Elasticity of Demand (XED) measures how the quantity demanded of one good responds to a change in the price of another good. It indicates the relationship between two products, showing whether they are substitutes or complements.

2. What is the formula for calculating XED?

XED=% Change in Price of Good B% Change/in Quantity Demanded of Good A​

3. In the case study, what is the XED between tea and coffee?

Without specific data from the case study, I can't provide an exact value for the XED between tea and coffee. Typically, this would be calculated using the formula provided, based on observed changes in demand and price.

4. What does a positive, negative, or zero XED indicate about the relationship between two products?

Positive XED: Indicates that the two goods are substitutes. When the price of one good increases, the demand for the other good also increases.

Negative XED: Indicates that the two goods are complements. A price increase in one good leads to a decrease in the demand for the other.

Zero XED: Suggests that the two goods are unrelated, meaning a change in the price of one does not affect the demand for the other.

5. Why is the XED between coffee and tea in Vietnam less than 1?

6. Provide another example of two products that might have a positive XED in Vietnam and explain why.

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1.measures the responsiveness in the quantity demanded of one good when the price for another good changes

2. % change in quantity demanded of productA/ %change in price of product B

3. tea is a subsitution good of coffee

4. subsitutes = postive

complements: negative

5. because the XED is 0.5

6. an example is coca and pepsi, because increasing the price of coca will also increas of pepsi

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1.
Measures the responsiveness of demand for a good following a price change in another good.
2.
Formula: % change in demand of product A/ % change in price of product B
3.
0.5
4.
Positive indicates a substitute relationship and negative indicates a complementary relationship
5.
Because they are both popular and most of the population wants both of them. Only a small population prefers tea over coffee or coffee over tea.
6.
Banh Mi and fried rice.
because those 2 are very popular among everyone, and typically they don’t need to be priced competitively due to little populations wanting one over the other everytime

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1. Measures the responsiveness of the quantity demanded for one product following the change in the price of another product

2. XED = %change in quantity demanded of product A / %change in the price of product B

3. 10%/20%=0.5

positive: substitute

Negative: compliment

Zero: independent

5. Because they are weak substitutes (inelastic), which means that coffee and tea have closer substitutes (e.g. tea/coffee brands, tea/coffee types, …)

6. Fish and Pork (in terms of meat); Squid and Crab (in terms of seafood); Macademia nut and Cashew nut