How is cross elasticity of demand used?
1 Answer
Jan 17, 2016
Cross Elasticity of Demand is used to judge the kind of relation that exists between two goods.
Explanation:
Cross Elasticity measures the sensitiveness of change in quantity demand of a given good with to a given change in the price of another good.
In estimating the Cross Elasticity we should not ignore the sign.
If Cross Elasticity is infinity, the two goods are perfect substitutes.
If Cross Elasticity is zero, the two goods are unrelated.
If Cross Elasticity is positive, the two goods are substitutes.
If Cross Elasticity is negative, the two goods are complementary.
