QUANTITATIVE ECONOMICS

Cross Elasticity of Demand (XED)
You need to be able to:
• Calculate XED using the following equation.
Calculating XED
Step 1
Calculate the percentage changes in price of one good and the quantity demanded of the
other good.
The change in price is worked out by taking the original price of the first good away from the
new price and then dividing that by the original price.
The change in quantity demanded is worked out by taking the original quantity of the second
good away from the new quantity and then dividing that by the original quantity.
E.g.
If the quantity demanded of white chocolate Easter eggs falls from 40,000 to
32,000 per year, when the price of dark chocolate Easter eggs is reduced from $5
to $4.50.
Then the percentage change in price is:
and the percentage change in quantity demanded is:
Step 2
Divide the percentage change in quantity demanded of the second good by the percentage
change in price of the first good, in order to get the value of the XED.
E.g. In the example above, .
The positive value means that the two goods in question are substitutes for each
other. If a negative value is found, then the goods are complements. A value of
zero would mean that the goods were unrelated.
Now you have a go!
Question 2.4
Calculate the XED for the following changes and state whether the goods are complements
or substitutes:
a. If the price of a good increases by 16% and the quantity demanded of another good
falls by 10%.
b. If the price of a good increases from $7.00 to $7.70 and quantity demanded of
another good falls from 75 units to 60 units.
c. If the price of a good falls from $6.50 to $5.20 and quantity demanded of another
good falls from 1,200 to 1,140 units.
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