Enter the price of product A at two different time points and the demand for product B at those same time points into the cross-price elasticity calculator. The calculator will display the CPE.

Cross Price Elasticity Formula

The following formulas can be used to calculate the price elasticity across two different products.

CPE = (PA1+ PA2) / (QB1 + QB2) * (QB2-QB1)/ (PA2-PA1)

  • Where CPE is the cross-price elasticity
  • PA1 is the price of product A at time point 1
  • PA2 is the price of product A at time point 2
  • QB1 is the quantity of product B at time point 1
  • QB2 is the quantity of product B at time point 2

Cross Price Elasticity Definition

Cross-price elasticity measures the responsiveness of the quantity demanded of one good to a change in the price of another related good. It is calculated by dividing the percentage change in the quantity demanded of one good by the percentage change in the price of the other good.

Cross-price elasticity is crucial because it helps businesses understand how the demand for a particular good is affected by changes in the price of a related product. This information is valuable in determining pricing strategies, forecasting demand, and making informed business decisions.

When goods are substitutes, a positive cross-price elasticity indicates that an increase in the price of one good leads to an increase in the demand for the other good. This implies that consumers view the two goods as interchangeable, and when the price of one rises, they switch to purchasing the other.

For example, if the price of brand A smartphones increases, consumers may choose to buy brand B smartphones instead. A high positive cross-price elasticity suggests that the goods are close substitutes, and businesses can adjust their pricing strategies accordingly to capture market share from competitors.

On the other hand, when goods are complements, a negative cross-price elasticity indicates that an increase in the price of one good leads to a decrease in the demand for the other good. Complementary goods are typically consumed together, such as coffee and cream.

How to calculate cross price elasticity?

How to calculate cross price elasticity

  1. First, find the price of A and demand of B at time point 1

    This will be the total price of product A and the total demand in the quantity of product B at the starting time point.

  2. Next, find the price of A and demand of B at time point 2

    Just as done in step 1, find the price of A and demand of B at the ending time point.

  3. Calculate CPE

    Calculate the elasticity using the formula above and the price and demand from steps 1 and 2.

FAQ

What is cross price elasticity

Cross price elasticity measures the effect changing in the price of one product, for example, product A has on the overall demand of another product B. An example of this is if you increase the price of Doritos in a convenience store, the demand for a similar generic chip may increase due to people not wanted to spend the extra money.