Question

Discuss the concept of Cross Elasticity of Demand and explain its practical significance for a manufacturing firm that produces both complementary products and close substitutes.

09 Jul 2026
Answer :
Word Count : 556
Cross Elasticity of Demand refers to the degree of responsiveness of the demand for one commodity to a change in the price of another related commodity, while other factors remain constant. It measures how the demand for a product is affected by changes in the prices of other products. It is an important concept in engineering management and economics because manufacturing firms often produce multiple products that may be related as substitutes or complements. The formula for cross elasticity of demand is: Cross Elasticity of Demand = Percentage change in quantity demanded of Product X / Percentage change in price of Product Y The value of cross elasticity indicates the relationship between two products. When the cross elasticity is positive, the products are considered substitutes. An increase in the price of one product leads to an increase in the demand for the other product because consumers shift their preference toward
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