CROSS ELASTICITY OF DEMAND 

 Cross elasticity of demand refers to a change in the quantity demanded of one commodity due to a change in the price of another commodity. It is mostly applied to related goods which are substitutes or complementary to each other.

 For example, in the case of tea and coffee, they are substitutes and in the case of tv and remote, they are complementary.

    Ec = % change in quantity demanded of commodity A
            % change in the price of commodity B

Where,

            commodity A = original commodity,

            commodity B = another commodity,

                             Ec = cross elasticity of demand.

For example,

      Change in quantity demanded of coke=50%

                          Change in price of Pepsi =20%

Therefore,

    EC = 50/20 = 2.5            

This means a change in the price of Pepsi(increase) will lead to an increase in the quantity of demanded coke as demand for Pepsi is elastic. Therefore the prices of substitute goods do not change frequently or the price of coke and Pepsi change together.