The cross elasticity of demand (CED) is an important economic concept used to measure the responsiveness in the quantity demanded of one good when the price of another good changes. It is an important tool used by economists to track the impact of changes between goods.

The CED is typically represented as a ratio which is calculated as the relative changes in the quantity of a good divided by the relative changes in the price of another good. In order to determine the CED, we must first consider the goods in relation to one another.

For substitute goods, the cross elasticity of demand is always positive – the demand for one of the goods increases when the price of the substitute goods increases. This is an intuitive result as when the price of a good increases, consumers look for cheaper alternatives that are of similar quality items.

On the other hand, for complementary goods, the cross elasticity of demand is negative – the demand for one of the goods decreases when the price of the other goods increases. This reflects the fact that consumers must purchase both goods in order to achieve a certain level of satisfaction. As one of these goods get more expensive, people would spend less money on the two goods and thus demand for the first good will decline.

The cross elasticity of demand can help economists and businesses determine the influence of changes in prices and how these can affect the demand of each good. It can also be useful in predicting the behavior of consumers and thus informs pricing decisions that businesses make. Companies often use this concept to determine pricing strategies and to calculate the impact of changes to their products or services. The CED is a valuable tool for both economists and business managers for understanding the changes in the market equations.