quantity demanded of a particular good varies according to the price of other
goods. Cross elasticity of demand measures the responsiveness of the quantity
demanded of one good to changes in the price of another.
formula for measuring cross elasticity of demand for good X is:
% change in quantity demanded of good X
% change in price of another good Y
goods which are substitutes will have a positive cross elasticity. An
increase in the price of one good (e.g. mars bars) will lead to an increase
in the quantity demanded of a substitute (e.g. snickers).
goods which are complements will have a negative cross elasticity. An
increase in the price of one good (e.g. computers) will lead to a fall in
demand of a complement (e.g. computer games).
cross elasticity of two goods which have no relationship to each other would
be 0 (e.g. jelly and pot plants).