Cross Elasticity

Cross Elasticity - i Substitutes as in case of tea and...

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Cross Elasticity: The price elasticity of demand that we have studied so far is also called the "own elasticity." This is because we have determined the elasticity for good A with the change in the price of the same good. However, various goods A, B, C etc. hold a mutual relationship. As such if we attempt to find the elasticity of demand for good B whenever the price of good A changes, then it is called a cross elasticity ratio. However, the goods A and B may hold either of the following relationships:
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Unformatted text preview: i) Substitutes : as in case of tea and coffee or different brands of toothpaste, television sets etc. These goods are symbolized as B S which implies that B is a substitute of A. In this case, whenever the price of A rises the demand for A will fall but that of B will rise. Therefore the relation between P A and Q B is direct . Hence the sign of elasticity ratio will be positive. This can be illustrated as: P A &nbspQ A &nbspQ BS 10 &nbsp8 8 12 &nbsp6 &nbsp10...
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