Cross Elasticity of Demand

Statement

Cross elasticity of demand measures the degree of responsiveness of demand for one good to a change in price of another good, ceteris paribus.

Notes

Cross elasticity of demand (CED, also XED) is calculated as

$CED = \frac{\%\,\text{change in quantity demanded of Good X}}{\%\,\text{change in price of Good Y}}$

The sign reveals the relationship between the two goods: CED is positive for substitutes (a rise in the price of one raises demand for the other) and negative for complements (a rise in the price of one lowers demand for the other). The magnitude reflects closeness — the stronger the substitute or complement relationship, the larger $|CED|$. How CED is used to gauge the extent of cross-price effects is set out in applying XED.