Understanding Cross Elasticity of Demand for Perfect Substitutes
When analyzing goods that are perfect substitutes, the concept of cross elasticity of demand becomes crucial. Perfect substitutes are products that can be used in place of one another without any loss of satisfaction.
Definition of Cross Elasticity of Demand
- Cross elasticity of demand measures the responsiveness of the quantity demanded for one good when the price of another good changes.
Cross Elasticity for Perfect Substitutes
- For perfect substitutes, the cross elasticity of demand is generally positive and can be very high.
- This is because an increase in the price of one good will lead consumers to switch to the other good, increasing its quantity demanded.
Formula
- The formula for cross elasticity of demand is:
Cross Elasticity = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B)
Implications
- A high positive cross elasticity indicates that goods are strong substitutes. For example, if the price of coffee rises, consumers may buy more tea, leading to a significant increase in the quantity demanded for tea.
- Conversely, if the goods were not substitutes, the cross elasticity would be low or even negative.
Conclusion
- In summary, when goods are perfect substitutes, changes in the price of one will significantly affect the quantity demanded of the other, reflected in a high positive cross elasticity of demand.
- Understanding this relationship is essential for businesses and economists, as it influences pricing strategies and market competition.

Substitutes are directly related.
Here change in price of one good leads to change in demand of other good infinitely as they perfect substitutes.
so cross elasticity =+ infinity