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Please explain the logic with an example

Why cross elasticity of perfect substitute good is infinity


nisam M

nisam M

CA Foundation

10K+

28-Feb-21 17:34

20

Answers (3)

Cross Elasticity (A,B) = % change in quantity demanded in A / % change in price of B. For substitute goods, as the price of one good rises, the demand for the substitute good increases that means elasticity is always positive. For example, if the price of coffee increases, consumers may purchase less coffee and more tea. Thus in case of perfect substitutes, the cross elasticity of demand will be equal to positive infinity as they are fully replaceable and sensitive to each others prices.


sudha reddy

sudha reddy

Moderator

01-Mar-21 09:47

but how come demand is infinity , can u please elaborate

It is a theoretical concept - does not exist in reality.


Sriram Somayajula

Sriram Somayajula

Admin

04-Mar-21 19:15

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