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Cross price elasticity is no doubt a tough subject to understand. It is basically a branch of economics that measures the response to the demand of a commodity following a change in the price of another similar commodity. The measure is calculated by analysing the percentage of change in the quality demanded one product divided by the percentage of change in the price of a substitute or similar products.
What are the key points associated with cross price elasticity?
- Complementary goods have negative cross price elasticity. When the demand for one good increases, the demand for second good decreases.
- Substitute goods are having positive cross price elasticity. When the price of one good increases, the demand for other decreases.
- Independent goods are having cross price elasticity i.e. zero, when the price of one good increase, the demand for another good remains unchanged.
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