Cross elasticity or Cross-Price elasticity of demand:

• When the demand of the concerned commodity changes in response to the change in price of its related good (either substitute or complementary good), then the- extent of such change in demand is called cross elasticity or cross-price elasticity of demand.
• Cross elasticity of demand =  Percentage change in demand for good X Percentage change in price for good Y
• The cross-price elasticity of demand measures the change in demand for one good in response to a change in price of another good.
• The cross-price elasticity may be a positive value or negative value, depending on whether the goods are complementary or substitutes.

(A) Negative cross-price elasticity:

• If the cross-price elasticity is a negative value, it means the products for which cross-price elasticity is measured are complementary products.
• If two products are complementary, an increase in price of one product will lead to decrease in demand of another product.

Example:

• Petrol and cars are complementary products. If the price of petrol rises by 20%, the demand for cars that have poor fuel efficiency will fall.
• Complementary products are such products which needs to be consumed jointly.

(B) Positive cross-price elasticity:

• If the cross-price elasticity is a positive value, it means the products for which cross-price elasticity is measured are substitute products.
• If two products are substitutes, increase in price of one good will increase the demand of other good.

Example:

• Pure ghee and vanaspati ghee are substitute products. If price of pure ghee increases considerably, people may consume less of pure ghee and increase their consumption of vanaspati ghee will increase.
• Substitute goods are goods that can be used in place of one another.