Cross Elasticity of Demand

Cross Elasticity of Demand ($E_c$) measures the degree of responsiveness of quantity demanded of ONE commodity (say, X) to a change in the PRICE OF A RELATED commodity (say, Y), the price of X itself and income remaining constant.

The SIGN of cross elasticity tells us the relationship between the two commodities:

• Positive cross elasticity ($E_c > 0$) — a rise in the price of Y causes quantity demanded of X to RISE. X and Y are Substitutes (competing goods) — e.g., tea and coffee; when tea becomes costlier, some consumers switch to coffee, raising coffee's quantity demanded.
• Negative cross elasticity ($E_c < 0$) — a rise in the price of Y causes quantity demanded of X to FALL. X and Y are Complements (jointly-demanded goods) — e.g., tea and sugar, or a car and petrol; a rise in petrol's price reduces the quantity of cars demanded (or driven), since the two are used together.
• Zero cross elasticity ($E_c = 0$) — quantity demanded of X does not respond at all to a change in the price of Y. X and Y are Unrelated (independent) goods — e.g., rice and notebooks. …