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→Complements and Substitutes: formatting
Elasticity of demand can apply to complements and substitutes. The “cross elasticity of demand” is how the quantity demanded of one good responds to a change in price of a '''''different''''' good. Specifically, it is measured as the percentage change in demand for one good in response to the percentage change in price for a different good.
Elasticity of demand can apply to complements and substitutes. The “cross elasticity of demand” is how the quantity demanded of one good responds to a change in price of a '''''different''''' good. Specifically, it is measured as the percentage change in demand for one good in response to the percentage change in price for a different good.
Note that a change in the price of a substitute or complementary good causes the '''entire demand curve''' of the other good to move left or right.
Note that a change in the price of a substitute or complementary good causes the '''''entire demand curve''''' of the other good to move left or right.
If good “A” sees a 20% drop in demand based on a 20% increase in price of good “B”, then the cross elasticity of demand is -20%/20% = -1. Do you think good A and B are complements or substitutes? They are complements. A negative cross-elasticity in demand means they are complements. Their elasticity is in the same direction as the price elasticity of demand for the good itself.
If good “A” sees a 20% drop in demand based on a 20% increase in price of good “B”, then the cross elasticity of demand is -20%/20% = -1. Do you think good A and B are complements or substitutes? They are complements. A negative cross-elasticity in demand means they are complements. Their elasticity is in the same direction as the price elasticity of demand for the good itself.