Question

State the degrees of cross elasticity of demand.

Explain the cross elasticity of demand at various degrees.

Explain positive cross elasticity of demand.

Answer 1

1. Positive Cross Elasticity of Demand: Cross elasticity of demand is said to be positive when an increase in the price of one commodity (Y) leads to an increase in the demand for the other commodity (X). When two goods are substitutes for each other, cross elasticity will be positive because a decrease in the price of one decreases the demand for the other. For example, tea and coffee are substitutes. A fall in the price of coffee (Y) increases the quantity demanded of coffee but reduces the quantity demanded of tea (X). Changes in the price of coffee and in the quantity demanded of tea will, therefore, have the same sign, i.e., cross elasticity is positive.
2. Negative Cross Elasticity of Demand: Cross elasticity of demand is said to be negative when a fall in the price of Y leads to an increase in the demand for X. Complementary goods have negative cross elasticities. For example, bread and butter are complementary goods. A fall in the price of butter causes an increase in the quantity purchased of not only butter but also bread. Thus, a change in the price of butter and in the quantity of bread demanded will have opposite signs, i.e., cross elasticity is negative.
3. Zero Cross Elasticity of Demand: Cross elasticity of demand is said to be zero when a change in the price of one commodity (Y) does not affect the demand for another commodity (X). If the two goods are not related to each other, say tea and a TV set, cross elasticity of demand will be zero. A change in the price of tea is not likely to influence the demand for TV.