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Cross-elasticity of demand


The responsiveness of the quantity demanded of one good to changes in the price of another good. It is measured by taking the proportionate change in quantity demanded of the first good and dividing this by the proportionate change in price of the second good. When this elasticity is positive, the goods are substitutes (since a rise in price of one causes an increase in demand for the other), and when negative they are coinplementary goods. As with any price elasticity of demand, cross elasticity can be measured by either the point-elasticity formula or the arc-elasticity formula. Finally, the numerical value of-the elasticity will measure the closeness of the relationship between the two goods, a zero value denoting no relationship and a high positive or negative value denoting a dose relationship.

Reference: The Penguin Dictionary of Economics, 3rd edt.