Economics Elasticity Of Demand Questions Medium
The concept of cross-price elasticity of demand refers to the measure of responsiveness of the quantity demanded of one good to a change in the price of another related good. It helps to determine the relationship between the demand for one good and the price of a substitute or complementary good. Cross-price elasticity of demand is calculated by dividing the percentage change in the quantity demanded of one good by the percentage change in the price of another good.
If the cross-price elasticity of demand is positive, it indicates that the two goods are substitutes, meaning that an increase in the price of one good will lead to an increase in the demand for the other good, and vice versa. On the other hand, if the cross-price elasticity of demand is negative, it suggests that the two goods are complements, implying that an increase in the price of one good will result in a decrease in the demand for the other good, and vice versa.
Cross-price elasticity of demand is an important concept in economics as it helps businesses and policymakers understand the dynamics of consumer behavior and make informed decisions regarding pricing, marketing, and product development strategies.