-Vandana Niroula

There are mainly three methods for calculating cross elasticity of demand:
~ Percentage method
~ Proportion method
~ Arc Elasticity method
It is ratio of percentage change in demand of one commodity with
percentage change in price of another commodity.

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑓𝑜𝑟 𝑥 𝑔𝑜𝑜𝑑 Y

𝐸𝑐 =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑦 𝑔𝑜𝑜𝑑
Symbolically,

∆𝑄𝑥 𝑃𝑦
𝐸𝑐 = ×
∆𝑃𝑦 𝑄𝑥
where, ∆𝑄𝑥 =change in quantity demanded of good x
∆𝑃𝑦 =change in price of good y
X
𝑃𝑦 =initial price of good y
𝑄𝑥 =initial quantity of good x
It is ratio of proportionate change in demand for one commodity with proportionate
change in price of another commodity.
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑥 𝑔𝑜𝑜𝑑

𝐸𝑐 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑥 𝑔𝑜𝑜𝑑
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑦 𝑔𝑜𝑜𝑑
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑦 𝑔𝑜𝑜𝑑
Symbolically,
∆𝑄𝑥

𝐸𝑐 =
𝑄𝑥
∆𝑃𝑦
𝑃
∆𝑄𝑥 ∆𝑃𝑦
𝐸𝑐 = ×
𝑄𝑥 𝑃
∆𝑄𝑥 𝑃𝑦
𝐸𝑐 = ×
∆𝑃𝑦 𝑄𝑥
According to arc method, cross elasticity of demand is the average between two
points in a cross demand curve.
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑥 𝑔𝑜𝑜𝑑

𝐸𝑐 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑥 𝑔𝑜𝑜𝑑
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑦 𝑔𝑜𝑜𝑑
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑦 𝑔𝑜𝑜𝑑
Symbolically,
∆𝑄
𝑄1 +𝑄2
∆𝑄 𝑃1 +𝑃2 ∆𝑄 𝑃1 +𝑃2
𝐸𝑐 = 2
∆𝑃 = × = ×
𝑄1 +𝑄2 ∆𝑃 ∆𝑃 𝑄1 +𝑄2
𝑃1 +𝑃2
2
𝑸𝟐 −𝑸𝟏 𝑷𝟏 +𝑷𝟐
𝑬𝒄 = ×
𝑷𝟐 −𝑷𝟏 𝑸𝟏 +𝑸𝟐
➢ Classification of markets
➢ Classification of goods
➢ Pricing policy
➢ Determination of boundaries between industries