What does cross price elasticity measure?

Cross price elasticity measures the responsiveness of the quantity demanded for one good when there is a change in the price of another good. This concept is particularly useful in understanding how different goods are related to one another, specifically whether they are substitutes or complements.

For instance, if two goods are substitutes, such as coffee and tea, an increase in the price of coffee may lead to an increase in the demand for tea, indicating a positive cross price elasticity. Conversely, if two goods are complements, like printers and ink cartridges, an increase in the price of printers could cause a decrease in the demand for ink cartridges, resulting in a negative cross price elasticity.

Understanding this elasticity helps businesses and economists analyze market behavior and the potential effects of price changes on related goods, making it key to strategic pricing and competition assessments.