When the cross price elasticity of a product is positive then we know that the good is?

17.2 Elasticity

Elasticity measures the proportionate change in one variable relative to the change in another variable. Consider, for example, the response of the quantity demanded to a change in the price. The price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in the price:

price elasticity of demand=percentage change in quantitypercentage change in price.

When the price increases (the percentage change in the price is positive), the quantity decreases, meaning that the percentage change in the quantity is negative. In other words, the law of demand tells us that the elasticity of demand is a negative number. For this reason we often use −(elasticity of demand) because we know this will always be a positive number.

• If −(elasticity of demand) > 1, demand is relatively elastic.
• If −(elasticity of demand) < 1, demand is relatively inelastic.

We can use the idea of the elasticity of demand whether we are thinking about the demand curve faced by a firm or the market demand curve. The definition is the same in either case.

If we are analyzing the demand curve faced by a firm, then we sometimes refer to the elasticity of demand as the own-price elasticity of demand. It tells us how much the quantity demanded changes when the firm changes its price. If we are analyzing a market demand curve, then the price elasticity of demand tells us how the quantity demanded in the market changes when the price changes. Similarly, the price elasticity of supply tells us how the quantity supplied in a market changes when the price changes. The price elasticity of supply is generally positive because the supply curve slopes upward.

The income elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in income. The income elasticity of demand for a good can be positive or negative.

• If the income elasticity of demand is negative, it is an inferior good.
• If the income elasticity of demand is positive, it is a normal good.
• If the income elasticity of demand is greater than one, it is a luxury good.

The cross-price elasticity of demand tells us how the quantity demanded of one good changes when the price of another good changes.

• If the cross-price elasticity of demand is positive, the goods are substitutes.
• If the cross-price elasticity of demand is negative, the goods are complements.

In general, we can use elasticity whenever we want to show how one variable responds to changes in another variable.

Key Insights

• Elasticity measures the responsiveness of one variable to changes in another variable.
• Elasticities are unitless: you can measure the underlying variables in any units (for example, dollars or thousands of dollars), and the elasticity will not change.
• Elasticity is not the same as slope. For example, the price elasticity of demand depends on both the slope of the demand curve and the place on the demand curve where you are measuring the elasticity.

	Definition: Cross price elasticity of demand refers to the percentage change in the quantity demanded of a given product due to the percentage change in the price of another "related" product. If all prices are allowed to vary, the quantity demanded of product X is dependent not only on its own price (see elasticity of demand) but upon the prices of other products as well. Context: The concept of cross price elasticity of demand is used to classify whether or not products are "substitutes" or "complements". It is also used in market definition to group products that are likely to compete with one another. If an increase in the price of product Y results in an increase in the quantity demanded of X (while the price of X is held constant), then products X and Y are viewed as being substitutes. For example, such may be the case of electricity vs. natural gas used in home heating or consumption of pork vs. beef. The cross price elasticity measure is a positive number varying from zero (no substitutes) to any positive number. Generally speaking, a number exceeding two would indicate the relevant products being "close" substitutes. If the increase in price of Y results in a decrease in the quantity demanded of product X (while the price of X is held constant), then the products X and Y are considered complements. Such may be the case with shoes and shoe laces. Source Publication: Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993. Statistical Theme: Financial statistics Created on Thursday, January 3, 2002 Last updated on Monday, March 3, 2003

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When the cross price elasticity for two goods is positive the goods are?

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