Cambridge International as and a level Economics Ebook

Cross elasticity of demand
Cross elasticity of demand (XED)
is a numerical measure 
of the responsiveness of the quantity demanded for one 
product following a change in the price of another related 
product, 
ceteris paribus
.
Th
e formula used is:
XED
% change in quantity demanded of product A
% change in the price
=
o
of product B
Products that are substitutes for each other (e.g., diff erent 
types of laptop computer) will have positive values for the 
XED. If the price of B goes up, then people will begin to 
turn to product A because of its more favourable relative 
price. If the price of B falls, then consumers will start to 
buy B instead of A. Products that are complements (e.g., 
computers and printers or soft ware) will have negative 
values of XED. If the price of B goes up, the quantity 
Cross elasticity of demand (XED):
a numerical measure 
of the responsiveness of the quantity demanded for one 
product following a change in the price of another related 
product.
KEY TERM
48
Cambridge International AS Level Economics

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demanded of B will drop and so will the complementary 
demand for A.
Assume the current average market price of a standard 
type of personal computer is $1,000 and current sales are 
100 units per day (see 
Figure 2.7
). Consider what might 
happen if, following a 2% decrease in the price of laptop 
computers (a substitute product), demand for PCs falls 
from 100 units to 98 units per day at the original price (
D
0 
to
 D
1
). Our calculation becomes:
XED
2% fall in demand for PCs
2% decrease in price of laptops
=
= +
1
Th
e positive sign indicates that the products are 
substitutes.