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Economics

CROSS ELASTICITY OF DEMAND

Cross elasticity of demand

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Cross elasticity of demand refers to the degree of responsiveness of demand for a commodity to change in the price of another commodity. In other words, cross elasticity of demands refers to the proportionate change in the quantity of goods (X) demand over the proportionate change in the price of another goods(Y) demanded, that as it measures how changes in the price of a commodity will affect the demand of another commodity. Cross elasticity of demand applies mainly if this is an increase in goods that have close substitutes as well as complementary goods. For example, demand for Elephant/ detergent will increase if there is an increase in the price of OMO.

MEASUREMENT OF CROSS ELASTICITY OF DEMAND

Cross elasticity of demand can be measured or calculated by using the co-efficient of cross elasticity of demand. Thus, co-efficient of cross elasticity of demand=

Percentage change in quantity demand of commodity X /percentage change in price of commodity Y

Income elasticity = %          Δ QX /% Δ PY

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