Cross elasticity of demand measures the responsiveness of the quantity demanded of one good to changes in the price of another good. It is calculated as the percentage change in quantity of the first good divided by the percentage change in price of the second good. Substitute goods have a positive cross elasticity, meaning demand for one increases as the other increases in price, while complementary goods have a negative cross elasticity, with demand for both decreasing with a price increase in one. Companies use cross elasticity to establish pricing strategies based on whether their goods have substitutes.

1. Cross Price Elasticity

2. What Is Cross Elasticity of Demand?
The cross elasticity of demand is an economic concept that measures the
responsiveness in the quantity demanded of one good when the price for another
good changes. Also called cross-price elasticity of demand, this measurement is
calculated by taking the percentage change in the quantity demanded of one good
and dividing it by the percentage change in the price of the other good.
Cross Elasticity of Demand Formula
Exy​= Percentage Change in Quantity of X
Percentage Change in Price of Y

3. Understanding Cross Elasticity of Demand
In economics, the cross elasticity of demand refers to how
sensitive the demand for a product is to changes in the price of
another product.
Substitute and Complementary Products
• As mentioned earlier, cross elasticity measures the demand
responsiveness in relation to related products. And these
related products can be either substitutes or complementary
products. Let us understand the difference between the two.

4. Substitute Products
Substitute products are goods that are in direct competition. An increase in the price of one product
will lead to an increase in demand for the competing product. For instance, an increase in the price of
petrol will force consumers to go for diesel and increase the demand for diesel. Now, the cross
elasticity value for two substitute goods is always positive.

5. Complementary Products
Complementary goods, on the other hand, are products that are in demand together. An ideal example
would be coffee beans and coffee paper filters. If the price of coffee increases, then the demand for
filters would reduce because the demand for coffee will reduce. The cross elasticity of demand for
two complementary products is always negative

6. Usefulness of Cross Elasticity of Demand
Companies utilize the cross elasticity of demand to establish prices to sell
their goods. Products with no substitutes have the ability to be sold at higher
prices because there is no cross-elasticity of demand to consider. However,
incremental price changes to goods with substitutes are analyzed to
determine the appropriate level of demand desired and the associated price
of the good.
• Additionally, complementary goods are strategically priced
based on the cross elasticity of demand. For example, printers
may be sold at a loss with the understanding that the demand
for future complementary goods, such as printer ink, should
increase

7. What Does the Cross Elasticity of Demand Measure?
Cross elasticity of demand evaluates the relationship between two
products when the price in one of them changes. It shows the relative
change in demand for one product as the price of the other rises or falls.

8. What is positive cross elasticity of demand ?
A positive cross elasticity of demand means that the demand for good A will
increase as the price of good B goes up. This means that goods A and B are
good substitutes. so that if B gets more expensive, people are happy to switch
to A. An example would be the price of milk. If whole milk goes up in price,
people may switch to 2% milk.