In
economics, the
cross elasticity of demand or
cross-price elasticity of demand measures the responsiveness of the quantity demanded for a
good to a change in the price of another good,
ceteris paribus. It is measured as the
percentage change in quantity demanded for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the demand of new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be:
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. A negative cross elasticity denotes two products that are
complements, while a positive cross elasticity denotes two
substitute products. Assume products A and B are
complements, meaning that an increase in the demand for A accompanies an increase in the quantity demanded for B. Therefore, if the price of product B decreases, the demand curve for product A shifts to the right, increasing A's demand, resulting in a
negative value for the cross elasticity of demand. The exact opposite reasoning holds for substitutes.