What is 'Cross Elasticity of Demand'

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. This measurement is calculated by taking the percentage change in the quantity demanded of one good and dividing it by the percentage change in price of the other good. The cross elasticity of demand may be positive or negative or zero

1. Cross elasticity of substitute goods is always positive . For example, if the price of coffee increases, the quantity demanded for tea (a substitute beverage) increases as consumers switch to a less expensive yet substitutable alternative.

2. Items and goods with zero cross elasticity are unrelated to each other. There is no change in demand of one goods with change of price of other goods. This happens within the same type of items or goods (i.e. within varieties). 

3. Cross elasticity for complementary goods is negative. As the price for one item increases, an item closely associated with that item and necessary for its consumption decreases because the demand for the main good has also dropped.

Companies utilize 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 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.