How to Calculate Cross Price Elasticity of Demand - Tutorial

Calculate Cross Price Elasticity of Demand - Definition, Formula, Example

Definition:

Cross price elasticity of demand evaluates the responsiveness of demand for a good to the variation in the cost of another good. This tutorial explains you how to calculate the Cross price elasticity of demand.

Formula:

Cross Price Elasticity of Demand = % change in quantity demanded of product of A / % change in price product of B % change in quantity demanded = (new demand- old demand) / old demand) x 100 % change in price = (new price - old price) / old price) x 100

Example :

Suppose the price of fuel increases from Rs.50 to Rs.70 then, the demand for the fuel efficient car increases from 20,000 to 30,000. Find out the cross price elasticity of demand for the fuel.

Given,

New demand = 30,000 Old demand = 20,000 New price = 70 Old price = 50

Solution:
Step 1:

% change in quantity demanded = (new demand- old demand) / old demand) x 100 = ((30000 - 20000) / 20000) x 100 = (10000 / 20000) x 100 = 0.5 x 100 = 50 %

Step 2:

% change in price = (new price- old price) / old price) x 100 = ((70 - 50) / 50) x 100 = (20 / 50) x 100 = 0.4 x 100 = 40 %

Step 3:

Cross Price Elasticity of Demand = % change in quantity demanded of product of A / % change in price product of B = 50 % / 40 % = 1.25 %


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