Question

urses /19FACMP ECO-202-20101 / Week 3/ Week 3 Short Answers Explain the cross-price elasticity of demand. Why is it negative or positive for certain types of goods? A BIE E <> Paragraph USX x2E Font family Font size acer

Answer 1

Answer
There are two types of related goods
Complement and substitutes.
The complement goods are used together for consumption and substitute goods are used one at a time.
Cross price elasticity of demand is the measure of the sensitiveness of quantity demanded of a good because of change in the price of related goods.

For complement goods, the goods are consumed together so an increase in price decreases the consumption of both goods It means an increase in the price of one decreases the demand for other so the relationship between complement goods is negative.

For substitute goods, the goods are not consumed together so an increase in the price of one increases the consumption of other goods so the relationship is positive.