What does cross-price elasticity of demand measure?

Cross-price elasticity of demand specifically measures the responsiveness of the quantity demanded of one good in relation to a change in the price of another good. It helps to determine the relationship between two products—whether they are substitutes or complements.

For instance, if the price of good Y increases and as a result, the quantity demanded of good X also increases, this positive cross-price elasticity indicates that the two goods are substitutes. Conversely, if the price of good Y goes up and the quantity demanded for good X decreases, it suggests that the two goods are complements.

Understanding this concept is crucial in analyzing market behavior and consumer choices because it quantifies the effect that price changes of related goods have on demand. This is distinct from the other options, which focus on different aspects such as income sensitivity, supplier responses, or overall consumer preferences, rather than the direct relationship between the price of one good and the demand for another.