Question

What does cross elasticity of demand between two goods imply? Give an example to explain.

Answer 1

1. Various goods are related to each other so that the quantity demanded of a commodity is influenced by change in not only its own price, but also by a change in the prices of related commodities.
2. For example, a change in the price of tea ordinarily leads to a change in the demand for coffee. Cross elasticity of demand is used to express such a situation.
3. The degree of responsiveness of quantity demanded of one commodity to a change in the price of another commodity is called the cross elasticity of demand. More precisely, cross elasticity of demand is defined as the percentage change in quantity demanded of a commodity with respect to the percentage change in the price of its related commodity.