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Cross elasticity of demand

In economics, the cross elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in the price of another good.

It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good. For example, if, in reponse to a 10% increase in the price of fuel, the quantity of new cars demanded decreased by 20%, the cross elasticity of demand would be -20%/10% = -2.

In the example above, the two goods, fuel and cars, are complements - that is, one is used with the other. In these cases the cross elasticity of demand will be negative.

Where the two goods are substitutes the cross elasticity of demand will be positive, so that as the price of one goes up the quantity demanded of the other will increase.

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