Wednesday, February 11, 2009

Cross-Price Elasticity in Action

Cross-price elasticity is a measure of how sensitive is a change in the demand for one good due to a change in price of another good. If it is either positive economists call those type of goods substitute and if the cross-price elasticity is negative economist call those type of goods complements.

In this article from 2008 we see the price of heating oil rose by 25% and the price of natural gas has increased by 17% and the demand for wood stoves increased by 54%. So are wood stoves and either oil burning heaters or natural gas burning heaters substitutes or complements, and is the cross-price elasticity elastic or inelastic for residential heating oil; natural gas?

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