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Cross Elasticity of demand and its types

Cross Elasticity of Demand:
The percentage change in quantity demanded for a commodity due to percentage  change in price of its related goods, other things remaining the same is known as cross elasticity of demand. The cross elasticity of demand may be expressed in the following way:

 

Types of Cross Elasticity of demand:

1. Positive Cross Elasticity:
When the demand for a commodity and the price of its related commodity change in the same direction, the cross elasticity of demand is positive. In case of the substitute goods, the cross elasticity of demand is positive.  
In the given figure quantity has been measured on OX-axis and price on OY-axis. At price OP of Y-commodity, demand of X-commodity is OM. Now as price of Y commodity increases to OP1 demand of X-commodity increases to OM1 Thus, cross elasticity of demand is positive.



2. Negative Cross Elasticity: 
When  demand for a commodity and the prices of its related commodity change into opposite direction, the cross elasticity of demand is negative. In case of complementary goods, the cross elasticity of demand is negative. 

 In the given figure quantity has been measured on OX-axis while price has been measured on OY-axis. When the price of commodity increases from OP to OP1 quantity demanded falls from OM to OM1. Thus, cross elasticity of demand is negative.





3. Zero Cross Elasticity of Demand: 
When the change in price of one commodity has no effect on the demand for another commodity, the cross elasticity of demand is said to be zero.
 In the given figure , the vertical demand curve DD is parallel to Y-axis. It represents zero cross elasticity of demand.