1. Cross price elasticity of demand (XPED)

2. Definition
Measures the responsiveness of demand for a good or service after a change on the price of another good or service.

3. The XPED of a good or service is calculated as follows:-
XPED formula
The XPED of a good or service is calculated as follows:-
Percentage change in the quantity demanded of good or service B
Percentage change in the price of good or service A
For substitute goods, this will give a positive(+) figure
For complementary goods, this will give a negative(-) figure

4. Substitute & complementary goods and directed numbers
Substitute goods are positively (+) correlated in respect of price and demand changes
Complementary goods, are negatively(-) correlated in respect of price and demand changes
Price Good A
Price Good A
Demand Good B
Demand Good B

5. Substitute goods The shift in demand for good B after a rise in the price of substitute good A
contraction in demand p1 p1 d2 d1 d1
Qd2
Qd1
Qd1
Qd2 Qd

6. Factors that determine the XPED for substitutes
XPED refers to the relationship between goods and/or services, the following are examples of substitutes. Consider how close a substitute each is.
private cars
public transport
butter
cheese
white bread
brown bread
books
Kindle
adidas
Nike

7. Substitute goods XPED calculations
Elasticity
e.g.
Degree of closeness
< +1
Inelastic
+ 0.6
Not close substitutes +1
Unitary
Some degree of substitutability
> +1
Elastic
+1.3
Close substitutes

8. Complimentary goods The shift in demand for good B after a rise in the price of complimentary good A
contraction in demand p1 p1 d1 d1 d2
Qd2
Qd1
Qd2
Qd1 Qd

9. Factors that determine the XPED for complimentary goods/services
XPED refers to the relationship between goods and/or services, the following are examples of substitutes. In the case of complimentary goods and services, one needs to also consider which is the primary product?
cars
fuel
mobile phones
service costs
sun cream
Holidays in the sun
chips
ketchup sachets
shoe polish
shoes

10. Complementary goods XPED calculations
Elasticity
e.g.
Degree of closeness
< -1
Inelastic
- 0.6
Not so closely linked or it is the secondary good and a necessity -1
Unitary
Some degree of closeness
> -1
Elastic
-1.3
Closely linked or it is the secondary good and not a necessity.

11. Example 1
After a -10% rise in the price of cars (average cost of a car rising from £10,000 to £11,000), the demand for public transport rises by -8% (1,000,000 journeys per day to 1,080,000) Calculate the XPED between cars and public transport. Comment on the resulting XPED

12. Example 2
After a -20% rise in the price of petrol (average cost of a litre of fuel rising from £1 a litre to £1.20), the demand for cars falls by +10% (10,000 cars sold a week to 9,000) Calculate the XPED between petrol and cars. Comment on the resulting XPED