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52 CHAPTER 2 DEMAND AND SUPPLY ANALYSIS
CROSS-PRICE ELASTICITY OF DEMAND

cross-price elasticity The cross-price elasticity of demand for good i with respect to the price of good j
of demand The ratio of is the ratio of the percentage change of the quantity of good i demanded to the per-
the percentage change of centage change of the price of good j:
the quantity of one good
demanded with respect to
the percentage change in ¢Q i 100%
Q i
the price of another good.
Q i , P j ¢P j
100%
P j
or, after rearranging terms,
¢Q i P j
(2.6)
Q i , P j
¢P Q i
j
where P denotes the initial price of good j and Q denotes the initial quantity of
j
i
good i demanded. Table 2.5 shows cross-price elasticities of demand for selected
fruit products.
Cross-price elasticity can be positive or negative. If 7 0, a higher price
Q i P j
for good j increases the quantity of good i demanded. In this case, goods i and j are
demand substitutes demand substitutes. Table 2.5 indicates that apples and peaches are demand sub-
Two goods related in such stitutes: As the price of peaches increases, the quantity of apples demanded
a way that if the price of increases (cross-price elasticity of the demand for apples with respect to the price
one increases, demand for of peaches 0.118). Likewise, as the price of apples increases, the quantity of
the other increases.
peaches demanded increases (cross-price elasticity of the demand for peaches with
respect to the price of apples 0.015).
If 6 0, a higher price for good j decreases the quantity of good i demanded.
Q i ,P j
In this case, goods i and j are demand complements. Table 2.5 indicates that apples
demand complements and bananas are demand complements: As the price of bananas increases, the quan-
Two goods related in such tity of apples demanded decreases (cross-price elasticity of demand for apples with re-
a way that if the price of spect to the price of bananas 0.207). Likewise, as the price of apples increases, the
one increases, demand for quantity of bananas demanded decreases (cross-price elasticity of demand for bananas
the other decreases.
with respect to the price of apples 0.409).

TABLE 2.5 Cross-Price Elasticities of Demand for Selected
Fresh Fruits Products
Demand for Demand for Demand for
Apples Bananas Peaches

Price of apples 0.586 a 0.409 0.015
Price of bananas 0.207 b 1.199 1.082
Price of peaches 0.118 0.546 1.105

a This is the price elasticity of demand of apples.
b This is the cross-price elasticity of demand of apples with respect to the price of peaches.
Source: Elasticities taken from Table 5 in S. R. Henneberry, K. P. Piewthongngam, and H. Qiang.
“Consumer Safety Concerns and Fresh Produce Consumption,” Journal of Agricultural Resource
Economics, 24 (July 1999): 98–113.