## Cross elasticity of demand (XED)

### Cross elasticity of demand

The cross elasticity is a measure of the sensitivity of the demand for one product to changes in the price of another.

### Formula:

Cross price elasticity varies from zero to infinity. As before, the now familiar descriptions are used:

Value | Description |
---|---|

0 | Perfectly inelastic |

Under 1 | Inelastic |

1 | Unitary |

Over 1 | Elastic |

Infinity | Perfectly elastic |

### Significance of XED sign

The sign is as important as the numerical value, however.

Some products tend to be bought together, others are purchased in competition to each other.

- Products which are in
**joint demand**are called**complementary goods**. - Products which are in
**competitive demand**because customers see them as interchangeable, are called**substitute goods**.

Examples of **complements** are strawberries and cream, fish and chips, cars and petrol, printers and printer ink. Complementary goods have negative cross price elasticities. Perfect complements will have a cross price elasticity of infinity.

#### Example - complements

Examples of **substitutes** are beef and lamb, gas and heating oil, petrol and diesel fuel. (Note that the substitution may not be possible at once). Substitutes have positive cross price elasticities.

#### Example - substitutes

Cross price elasticity can change with time.