Moving on to the final demand elasticity, we will look at XED – how the demand for one good varies based on the price of another.

XED, or cross elasticity of demand, observes the responsiveness of demand of good A to a change in the price of good B. This allows us to assess the relationship between two goods. XED, like YED, can be both positive and negative and is calculated by the % change in demand for good A over the % change in the price of good B.

When the value calculated is negative, or XED<0, then the goods are defined as complementary goods. This means they are goods often purchased together, and so when the price of one goes up, demand for the other falls. For example, if the price of PS5s goes up, then demand for PS5 games would fall – these goods are complementary.

Oppositely, when the value is positive, or XED>0, then the goods are known as substitute goods. Essentially, one is bought instead of the other. If the price of good A rises, demand for good B rises as consumers buy more of good B and less of good A. Sticking with PS5s, this can be exemplified with the PS5 and another console – the Xbox Series X. If the price of the PS5 rose, then demand for a substitute rises as fewer people want to pay the higher price, and so more of the Xbox Series X is bought.

Finally, if XED=0, or is very close, then the goods can be referred to as unrelated – a change in the price of one has no significant effect on demand for the other.

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