The relationship between cross elasticity of demand and substitute and complementary goods
Cross elasticity of demand measures how the demand for one good changes when the price of a different good changes. The sign of the answer tells you whether the two goods are substitutes or complements.
Formula
XED = %ΔQd(A) ÷ %ΔP(B)
Real World
When PlayStation raised the price of its PS5 console in 2022, Microsoft reported a spike in Xbox Series X sales — a positive XED confirming the two are substitutes.
Exam Focus
Lead with the sign in your answer: positive = substitutes, negative = complements; then use the magnitude to comment on closeness of the relationship.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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