Cross Elasticity

A cross elasticity is the effect on the change in demand or supply of one good as a result of a change in something related to another product. Unqualified, it means a cross price elasticity: how much the change in price of one product will change sales volumes of another. The cross price elasticity of product A with product B is: (ΔQA/QA)/(ΔPB/PB) where QA is the quantity sold of A ΔQA is the change in the quantity of A sold PB is the price of B and ΔPB is the change in the price of B. A cross elasticity may be positive or negative. If the two goods are complementary then an increase in the price of one will reduce demand for both. If they are substitutes (e.g., natural and synthetic rubber) an increase in the price of one will increase demand for the other.