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==Complements and Substitutes==
==Complements and Substitutes==
A complement of a good is something that is used with it. Compact disks (CDs) are complements of CD players. Hole punchers are complements to three-ring binders. Monitors are complements to desktop computers. Gasoline is a complement to cars. Bread is a complement to sandwich meat.
'''''A complement of a good is something that is used with it'''''. Compact disks (CDs) are complements of CD players. Hole punchers are complements to three-ring binders. Monitors are complements to desktop computers. Gasoline is a complement to cars. Bread is a complement to sandwich meat.
A substitute of a good is something that replaces it. Bicycles are substitutes for mopeds. Motorcycles are substitutes for cars. Channel 2 is a substitute for channel 4 on television. One non-fiction book is a substitute for another. Chicken is a substitute for beef.
'''''A substitute of a good is something that replaces it'''''. Bicycles are substitutes for mopeds. Motorcycles are substitutes for cars. Channel 2 is a substitute for channel 4 on television. One non-fiction book is a substitute for another. Chicken is a substitute for beef.
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 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.
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.
Ponder that for a minute.
Ponder the above for a while.
== Trade and the Creation of Wealth ==
== Trade and the Creation of Wealth ==