Cross Elastic Demand (XED)

The equation given in the lecture slides is:

\text{XED} = \frac{\frac{\Delta q_A}{q_A}}{\frac{\Delta p_B}{p_B}}

But that's a bit ambiguous, so it's better write as:

\text{XED}
= \frac{\frac{q_{A,2}-q_{A,1}}{q_{A,1}}}{\frac{p_{B,2}-p_{B,1}}{p_{B,1}}}
= \frac{\text{percentage change in quantity of A}}{\text{percentage change in price of B}}

If XED is positive, the two goods A and B are substitutes for each other. If XED is negative, the two goods are complimentary.

Example

Here, product A is the CNC machining system and product B is the control software.

Quantity of product A sold can be found using revenue = price \times quantity:

quantity_1 = \frac{2\,250\,000}{11\,000} = 205

quantity_2 = \frac{4\,850\,000}{11\,000} = 441

\text{percentage change in quantity of A} = \frac{441-205}{205} = 1.156

\text{percentage change in price of B} = \frac{2600-6800}{6800} = -0.618

\text{XED} = \frac{1.156}{-0.618} = -1.871

1.2 KiB Executable File Raw Blame History

Cross Elastic Demand (XED)

Example

1.2 KiB

Executable File

Raw Blame History