Cross-Price Elasticity: Substitutes and Complements

Printers and ink aren't the same product, but their demands are tangled together. Cross-price elasticity of demand captures that link: it's the percent change in quantity demanded of good A divided by the percent change in price of good B. Nothing here is negative by default, because unlike regular elasticity, the sign itself carries the information.

A positive cross-price elasticity means the goods are substitutes: tea gets pricier, so people buy more coffee instead, pushing coffee's quantity demanded up alongside tea's price. A negative value means complements: printers get pricier, people buy fewer printers, and ink purchases fall right along with them, since you need both together. A value at or near zero means the goods are unrelated: a price swing in one leaves the other's quantity demanded essentially untouched, bicycles and bananas being a clean example. That zero result isn't a failed measurement. It's the measurement working exactly as intended, reporting back that no real relationship exists.

This sits next to price elasticity and income elasticity as the third lens for reading how demand bends. Where price elasticity asks how a good responds to its own price, cross-price elasticity asks how it responds to a neighbor's price, which is exactly the tool you need once a unit starts asking how a tax or price change in one market ripples into another.