Cross elasticity of demand, also known as cross-price elasticity of demand, is a measure that quantifies the responsiveness of the quantity demanded of one good to a change in the price of another good. It helps to assess how closely related two goods are in terms of consumer preferences.

The formula for cross elasticity of demand (Exy) is:

\[
Exy = \frac{\% \text{ Change in Quantity Demanded of Good X}}{\% \text{ Change in Price of Good Y}}
\]

The result can be positive, negative, or zero, indicating the nature and strength of the relationship between the two goods:

1. **Positive Cross Elasticity (Exy > 0):**
– If the cross elasticity is positive, it implies that the two goods are substitutes. An increase in the price of one good leads to an increase in the quantity demanded for the other good, and vice versa.

2. **Negative Cross Elasticity (Exy < 0):** - A negative cross elasticity suggests that the two goods are complements. An increase in the price of one good results in a decrease in the quantity demanded for the other good, and vice versa. 3. **Zero Cross Elasticity (Exy = 0):** - A zero cross elasticity indicates that the goods are unrelated, meaning a change in the price of one good has no effect on the quantity demanded of the other. These goods are considered independent or unrelated in consumption. Understanding cross elasticity of demand is essential for businesses and policymakers in various ways: - **Product Substitutability or Complementarity:** Businesses can use cross elasticity to understand whether their products are substitutes or complements with other products in the market. This information is valuable for pricing and marketing strategies. - **Impact of Price Changes:** Cross elasticity helps businesses anticipate the impact of price changes in related goods on the demand for their own products. - **Policy Decisions:** Policymakers can use cross elasticity to evaluate the effects of taxation or subsidy policies on related goods and industries. - **Consumer Behavior Analysis:** Cross elasticity provides insights into consumer preferences and how they make choices between different goods. For example, if the cross elasticity between tea and coffee is positive, it suggests that these two beverages are substitutes. If the price of coffee increases, consumers might switch to drinking more tea. On the other hand, if the cross elasticity between printers and printer ink is negative, it indicates that these goods are complements. If the price of printers increases, the demand for printer ink may decrease. Cross elasticity complements other elasticity measures, such as price elasticity of demand, in providing a comprehensive understanding of how changes in prices affect the demand for goods in the market.