# Cross Price Elasticity Calculator

• Price Elasticity of Demand
• Change in Volume vs. Price

Useful for pricing strategy and business planning.

Also calculates change in total sales.

## Cross Price Elasticity: 1.22

Price Relationship: Substitute Goods

### Cross Price Elasticity Calculator: Frequently Asked Questions

#### How Do You Use the Cross Price Elasticity Calculator

Simple - enter the following items:

• Original Price of Product A
• New Price of Product A
• Original Quantity Demand for Product B
• New Quantity Demand for Product B
And hit the calculate button. The tool will calculate the cross price elasticity of demand and evaluate the relationship between the two products.

#### How Do You Calculate Cross Price Elasticity of Demand

We use the standard economics formula for calculating cross elasticity of demand relative to price. This is generally expressed as:
Cross Price Elasticity Formula: ((original + new price of product A ) / (original + new quantity of product B)) * ((change in quantity)/(change in price))

#### What does Positive Cross Price Elasticity Mean?

The products are substitutes; demand for the second good increases when the price of the first good increases.

#### What does Negative Cross Price Elasticity Mean?

The products are potentially complements, goods that are consumed in conjunction with each other. Demand for the second good declines when the price of the first good is increased. This is likely in line demand for the original good, which we expect to decline when prices are raised.

#### What Can Cause Changes in Cross Price Elasticity?

Significant changes in the perceived quality of either product will affect cross price elasticity. For example, consider the competition between premium products and economy offers in consumer packaged goods. Both products service the same fundamental consumer needs. The relative sales between the two will be driven by consumer brand awareness, perceptions of quality, and broader trends in product design.

#### What Can You Do With Cross Elasticity of Demand?

Understanding cross elasticity of demand has significant applications in the fields of pricing and economic policy, particularly trade policy. The availability of substitute products is a major determinant in the ability of a firm to set price. Products that need to compete against substitute products need to have pricing set at levels that support an appropriate market share. Similarly, understanding the degree to which products can be substituted by another national is a powerful indicator of the consequences of trade policies and likely responses. Products without viable substitutes can be sold at higher prices since cross elasticity of demand is less of a factor in determining their market share.

Identifying complementary goods is similarly useful in that you can set pricing in anticipation of future business. This is especially powerful when you're looking at opportunities to bundle complementary goods and services to a buyer who is particularly sensitive to certain items. For example, many buyers are price sensitive to the upfront cost of installing a piece of manufacturing equipment. Each of these platforms usually has a set of complementary products and services that will be pulled along by the initial purchasing decision: parts, accessories, maintenance services, consumable products, and financing. Bundle pricing can be used to get aggressive on the initial quote (the capital investment decision) and generate the bulk of your profits from the ongoing purchases required to maintain and operate that equipment.