Question

If the demand for good X increases when the price of good Y decreases, what can we say about the cross-price elasticity between these two goods, are they substitutes or complements to each other?

Answer 1

Answer

The cross elasticity of demand refers to the degree of responsiveness of change in quantity demanded in good x due to change in the price of good x, ceteris paribus. If the demand for good X increases as the price of Y decreases then this would mean the cross-price elasticity is negative between them.Because a decrease in the price of Y increase the demand for good X. These two good must be complements. Complements are goods that are consumed together. Since a decrease in the price of Y increases the demand for good x the two goods X and Y are complements.

Answer 2

Answer:

The goods are complements, and their cross-price elasticity is negative.

Explanation:

• Cross-price elasticity measures how the demand for good X responds to a price change in good Y:

  $$E_{xy}=\frac{\mathrm{\%}\mathrm{\Delta }\text{Demand for X}}{\mathrm{\%}\mathrm{\Delta }\text{Price of Y}}$$

• Observation: When the price of Y decreases, demand for X increases.

• This implies an inverse relationship, so $E_{xy}<0$.

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• Conclusion:

• Complements (e.g., coffee and cream, printers and ink).

• A price drop in Y makes the complementary good X more attractive, boosting its demand.

• 
  

Key Point:
Negative cross-price elasticity = Complements.
Positive cross-price elasticity = Substitutes.