The change in the demand of one good (X) in response to a change in the price of another good (Y) is called ‘cross elasticity of demand’. Its measure is-( Proportionate Change in Demand for X)/(Proportionate Change in Price of Y).
Symbolically, (AD x / AP y) x ( Py / Dx )
In this context, following points should be noted specifically.
1. Cross elasticity of demand relates the responsiveness of demand for one good to the price of another good. Therefore, if there are no goods in the market, each of them has (n-1) cross elasticities of demand.
ADVERTISEMENTS:
2. The value of across price elasticity of demand varies from case to case. More specifically, if two goods are totally unrelated, then the cross elasticity would be zero. If the two goods are substitutes of each other, then their cross elasticity will have a positive sign and the value of elasticity will depend upon the degree of substitution between them. It will be higher for closer substitutes and smaller for weaker ones. In contrast, the sign of cross elasticity in the case of complementary goods will be negative and its value will depend upon the degree of complementarily between the two goods.