Question

Write a detail note on the cross price elasticity of demand for complementary. Goods and substituties good

Answer 1

Cross price elasticity of demand for substitute goods is positive and the cross price elasticity of demand is negative in the case of complimentary goods.

Explanation:

• Cross price elasticity of demand for substitute goods is positive implying that as the price of any substitute good increases the demand for the concerned product or commodity also increases and vise versa.As an example,considering all other facts constant,as the price of tea increases the consumer demand for tea will decrease and as a result,consumers will shift their preference away from tea to other related products such as coffee or herbal tea.
• Cross price elasticity for substitute goods is negative indicating that as the price of any compliment good increases,the consumer demand for the concerned good or product decreases and vise versa.For example,as the price of butter or cheese increases,the consumer demand for bread will likely decrease as bread and butter or cheese are complimentary to each other or used complimentarily,again considering all other factors constant.