Economics Elasticity Of Demand Questions Medium
Cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good in the short run. It indicates how the demand for one good is affected by a change in the price of a related good.
In the short run, cross-price elasticity of demand can be positive, negative, or zero. A positive cross-price elasticity of demand suggests that the two goods are substitutes, meaning that an increase in the price of one good leads to an increase in the demand for the other good. For example, if the price of coffee increases, the demand for tea may increase as consumers switch to the cheaper alternative.
On the other hand, a negative cross-price elasticity of demand indicates that the two goods are complements, meaning that an increase in the price of one good leads to a decrease in the demand for the other good. For instance, if the price of smartphones increases, the demand for smartphone cases may decrease as consumers are less willing to purchase both items together.
Lastly, a zero cross-price elasticity of demand suggests that the two goods are unrelated or independent, meaning that a change in the price of one good has no impact on the demand for the other good. This often occurs when the goods are not substitutes or complements and do not have any significant relationship.
Overall, the concept of cross-price elasticity of demand in the short run helps economists understand the relationship between the prices of different goods and how changes in one price can affect the demand for another good.