When analyzing the behavior of consumers in response to price changes, two important concepts come into play: own price elasticity and cross price elasticity.
Own Price Elasticity refers to how the quantity demanded of a good changes in response to a change in its own price. It is calculated by taking the percentage change in quantity demanded and dividing it by the percentage change in price. If the own price elasticity is greater than 1, the demand is considered elastic, meaning consumers are quite responsive to price changes. Conversely, if it is less than 1, demand is inelastic, indicating less sensitivity to price fluctuations.
Cross Price Elasticity, on the other hand, measures how the quantity demanded of one good changes in response to a change in the price of another good. This can indicate whether two goods are substitutes or complements. A positive cross price elasticity suggests that the two goods are substitutes; as the price of one rises, the quantity demanded of the other also increases. Alternatively, a negative cross price elasticity indicates that the goods are complements; when the price of one rises, the quantity demanded of the other decreases.
In summary, the key distinction lies in what is being measured: own price elasticity looks at the impact of a price change on the same good, while cross price elasticity examines the effect of a price change of one good on the demand for a different good.