Cross-price Elasticity of Demand (CED)

Per (Gans et al.), cross price elasticity of demand (CED) measures how much quantity demanded of a good responds to a change in the price of a related good.

Why It Matters
One reason elasticity is important to understand is that it helps to predict consumer’s behaviour. This helps businesses with their pricing strategies.

Example
Complements: have negative cross price elasticity. (e.g: cars and petrol).
Substitutes: have positive cross-price elasticity (e.g: Pepsi and Coke).

Limitation
One limitation of elasticity, per “Price Elasticity - the Decision Lab” (2025), is it assumes consumers are rational, which is the biggest criticism of economics. Reality isn’t black and white, instead it’s shaped by cognitive biases, emotions, and context. For example, our willingness to pay shifts with expectations and how we frame value in the moment, like how it feels to pay $7 for a coffee in the morning and then paying $7 for a cocktail at night. Human’s decisions aren’t always linear.

Further
Complements example: petrol vs cars: if the price of cars rises -> the demand for cars and petrol falls, and therefore the price for petrol falls whilst the price for cars has risen.

Substitutes example: Pepsi vs Coke: if the price of Pepsi rises -> the demand for Pepsi will fall, and consumers will switch to Coke instead. The demand for Coke will rise and so will the price.

Work cited:
Gans, Joshua, et al. Principles of Microeconomics. South Melbourne, Victoria, Australia, Cengage Learning Australia, 2021.

“Price Elasticity - the Decision Lab.” The Decision Lab, 2025, thedecisionlab.com/reference-guide/economics/price-elasticity.