Lesson preview · Other Elasticities
Cross-Price Elasticity — Substitutes & Complements
~7 min · Free to read
When the price of coffee goes up, what happens to the demand for tea? What about sugar? Probably very different things — tea is a substitute (if coffee gets pricey, switch), while sugar is a complement (if you brew less coffee, you need less sugar). Measuring this relationship between two goods is the job of Cross-Price Elasticity of Demand (XED).
Key Term
Cross-Price Elasticity of Demand (XED)
Measures how the demand for one good responds to a price change in a different good. Sign tells you the relationship; magnitude tells you the strength.
Cross-price elasticity — quantity of A over price of B (asymmetric).
Two different products live in this formula: the quantity of good A on top, the price of good B on the bottom. That’s what makes XED a cross elasticity.
Key Term
The XED Classification
→ Substitutes. When B gets pricier, people buy more A. (Coffee ↔ tea, Coke ↔ Pepsi, butter ↔ margarine.) → Complements. When B gets pricier, people buy less A. (Printers ↔ ink, hot dogs ↔ buns, cars ↔ gasoline.) → Unrelated. Pencils ↔ bananas — totally different markets.
Tip
Sign tells type, size tells strength
means weak substitutes (related, but barely). means strong substitutes (nearly interchangeable). Same logic for negatives: weak complements, strong complements.
Check yourself · no marks
The price of Coke rises 10%. Pepsi sales rise 8%. What does this tell you about XED between Coke and Pepsi?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Check yourself · no marks
A video game console’s price rises 20%. Game cartridges for that console see sales fall 15%. Are these substitutes or complements? What’s the XED?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Worked Example
The price of printer ink rises 20%. Sales of printers fall by 10%. Calculate the XED of printers with respect to ink and interpret.
Practice · 1 / 5
The price of butter rises 15%. Quantity demanded of margarine rises 30%. What is XED?
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