Changes

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 another 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 another 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.

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.

If, however, good A sees a 20% increase in demand based on a 20% increase in price of good B, then their cross-elasticity in demand is 20%/20% = 1.  This positive value means that A and B are substitutes for each other.

If, however, good A sees a 20% increase in demand based on a 20% increase in price of good B, then their cross-elasticity in demand is 20%/20% = 1.  This positive value means that A and B are substitutes for each other.