Cross Elasticity of Demand (XED)

Cross elasticity of demand is the responsiveness of demand for good X to a change in price of good Y.

Substitutes, Complements and Unrelated goods

• Substitute goods are goods which can effectively replace the good in question. Therefore, an increase in price of one good leads to an increase in demand for its substitute and vice versa. As a result, XED is usually positive for substitutes.
• Complementary goods have a negative XED. If the price of one good increases, then the demand for a complement decreases. This is because both of the goods are commonly used together and as such, XED is usually negative.
• Unrelated/independent goods have XED=0.