What does cross elasticity of demand measure?

Cross elasticity of demand measures the responsiveness of the quantity demanded for one good in relation to changes in the price of another good. When the price of one product rises or falls, it can lead to an increase or decrease in the demand for another product, indicating whether these goods are substitutes or complements.

For instance, if the price of coffee increases, consumers might buy more tea instead, demonstrating a positive cross elasticity of demand for tea concerning coffee's price. Conversely, if two goods are complements (like printers and ink cartridges), a price increase in one can lead to a decrease in demand for the other, resulting in a negative cross elasticity. This concept is essential for understanding how goods interact in the market and helps businesses and economists gauge consumer behavior based on price changes in related products.