The cross price elasticity of demand (CPED) measures the responsiveness of changes in the quantity demanded to changes in the price of a different good. It is calculated using the following formula;

The calculation of the CPED will produce a value. This value will indicate the characteristics of the CPED. For instance;

• Between zero and one (inelastic) - quantity demanded of good B changes by a smaller percentage than the change in price of good A
• Between one and infinity (elastic) - quantity demanded of good B changes by a larger percentage than the change in price of good A

The sign indicates if the goods and substitutes or complements. For instance, substitutes have a positive sign and complements have a negative sign.

The following is an example of how to calculate the CPED;

Original price of good A = £8
Original quantity of good B = 20 units
New price of good A = £7
New quantity of good B = 25 units

It is evident that a £1 fall in price of good A, results in a 5 unit increase in the quantity demanded of Good B. The price elasticity of demand is

% Change in the Quantity of B

% Change in Price of Good A

+25%	=	- 2
-12.5%

Therefore, the cross price elasticity of demand is -2.00, which is termed as relatively elastic. The sign implies that the two goods are complements.