Cross Elasticity of Demand The extent to which demand for one product changes in response to the price change of another product XED is all about substitutes & compliments XED = %∆Qd of A %∆P of B XED can be positive, negative or zero

Cross Elasticity of Demand Positive: ↑P of A → ↑Qd of B these are substitutes! (eg. ↑P Coke → ↑ Qd Pepsi) the higher the XED, the closer the substitutes PAPA QBQB High Positive XED - small price increase in A → large increase in Qd of B  1 < XED Low Positive XED - large price increase in A → small increase in Qd of B  0<XED <1

Cross Elasticity of Demand Negative: ↑P of A →  Qd of B complements! (eg.↑P CD’s →  Qd CD Players) the more negative the XED, the closer the complements PAPA Low Negative XED - large price increase in A → small decrease in Qd of B  0 > XED > -1 High Negative XED - small price increase in A → large decrease in Qd of B  -1 < XED QBQB