**Definition:** Cross Elasticity of Demand (XED) measures the responsiveness of the quantity demanded of one good to a change in the price of another good. It helps in understanding the relationship between two goods, whether they are substitutes or complements. **Formula:** $$ XED = \frac{\% \text{ Change in Quantity Demanded of Good A}}{\% \text{ Change in Price of Good B}} $$ **Calculation:** To calculate XED, use the following approach: 1. **Determine the Change in Quantity Demanded of Good A (\(\Delta Q_A\)):** \[ \Delta Q_A = Q_{A2} - Q_{A1} \] 2. **Determine the Change in Price of Good B (\(\Delta P_B\)):** \[ \Delta P_B = P_{B2} - P_{B1} \] 3. **Calculate the Percentage Changes:** \[ \% \Delta Q_A = \left( \frac{\Delta Q_A}{Q_{A1}} \right) \times 100 \] \[ \% \Delta P_B = \left( \frac{\Delta P_B}{P_{B1}} \right) \times 100 \] 4. **Apply the XED Formula:** \[ XED = \frac{\% \Delta Q_A}{\% \Delta P_B} \] **Example:** Consider two goods, butter and margarine. If the price of butter increases from \$3 to \$3.30 per loaf, and the quantity demanded for margarine increases from 500 units to 550 units: \[ \Delta P_B = 3.30 - 3.00 = 0.30 \quad (\text{\$}) \] \[ \Delta Q_A = 550 - 500 = 50 \quad (\text{units}) \] \[ \% \Delta P_B = \left( \frac{0.30}{3.00} \right) \times 100 = 10\% \] \[ \% \Delta Q_A = \left( \frac{50}{500} \right) \times 100 = 10\% \] \[ XED = \frac{10\%}{10\%} = 1 \] An XED of 1 indicates that the goods are substitutes; as the price of butter rises, consumers increase their demand for margarine.

Types of Elasticities