How does the cross elasticity of demand differ from the price elasticity of demand? How are they related?

What will be an ideal response?


The cross elasticity of demand is the responsiveness of demand for one good to a percentage change in the price of another good. Instead of looking at the effect of the change in the good itself, we look at the effect on the amount demanded of another good. If the goods are substitutes, the cross elasticity of demand is positive, but the cross price elasticity of demand is negative when they are complements. A high positive cross elasticity of demand means the goods are close substitutes, which implies the price elasticity of demand will be relatively elastic because elasticity is a function of the closeness of substitutes.