Question

distinguish between substitutes and complementary goods on the basis cross price elasticity

Answer 1

Substitute goods :

• Substitute goods are those goods that are positively related to each other or in another words have positive cross price elasticity of demand.
• This is because when the price of one good increases, the demand for its substitute good also increases.
• Similarly when the price of one good decreases, the demand for its substitute also decreases.
• For example, tea and coffee are substitutes of each other. This is because when the price of tea increases, the demand for coffee increases as people prefer to drink coffee more than tea when it's price increases.

Complementary goods :

• Complementary goods are said to be negatively related to each other or in another words they are said to have a negative cross price elasticity of demand.
• This is because when the price of one of the good increases, the demand for another good decreases.
• Similarly when the price of one of the good decreases, the demand for another good increases.
• For example : when the price of petrol increases, the demand for cars decreases and when the price of petrol decreases people prefer driving cars more and hence its demand increases.