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## Mẹo Hướng dẫn How does change in price of complementary goods affect the demand of the given goods explain with the help of an example? Chi Tiết

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## What Is Cross Elasticity of Demand?

The cross
elasticity of demand is an economic concept that measures the responsiveness in the quantity demanded of one good when the price for another good changes. Also called cross-price elasticity of demand, this measurement is calculated by taking the percentage change in the quantity
demanded of one good and dividing it by the percentage change in the price of the other good.

Nội dung chính

What Is Cross Elasticity of Demand? Key Takeaways Cross Elasticity of Demand Formula Understanding Cross Elasticity of Demand Substitute Goods Complementary Goods Usefulness of Cross Elasticity of Demand What Does the Cross Elasticity of Demand Measure?What Does a Positive Cross Elasticity of Demand Indicate?What Does a Negative Cross Elasticity of Demand
Indicate?How Does Cross Elasticity of Demand Differ From Demand Elasticity?How Does Cross Elasticity of Demand Differ From the Cross Elasticity of Supply?How does change in price affect complementary goods?Which is an example of complementary goods affecting demand?What is complementary goods with example?What are complementary goods explain its impact on demand?

### Key Takeaways

The cross elasticity of demand is an economic concept that measures the responsiveness in the quantity demanded of one good when the price for another good changes.The cross
elasticity of demand for substitute goods is always positive because the demand for one good increases when the price for the substitute good increases.Alternatively, the cross elasticity of demand for complementary goods is negative.

Cross Elasticity of Demand

## Cross Elasticity of Demand Formula

E x y = Percentage Change in Quantity of X Percentage Change in Price of Y
E x y = Δ Q. x Q. x Δ P y P y
E x y = Δ Q. x Q. x × P y Δ P y
E x y = Δ Q. x Δ P y × P y Q. x
where: Q. x = Quantity of good X P y = Price of good Y
Δ = Change beginaligned &E_xy = frac textPercentage Change in Quantity of X textPercentage Change in Price of Y \ &phantom E_xy = frac frac displaystyle Delta Q_x displaystyle Q_x frac displaystyle Delta P_y
displaystyle P_y \ &phantom E_xy = frac Delta Q_x Q_x times frac P_y Delta P_y \ &phantom E_xy = frac Delta Q_x Delta P_y times frac P_y Q_x \ &textbfwhere: \ &Q_x = textQuantity of good X \ &P_y = textPrice of good Y \ &Delta = textChange \ endaligned ​Exy​=Percentage Change in Price of YPercentage Change in Quantity of X​Exy​=Py​ΔPy​​Qx​ΔQx​​​Exy​=Qx​ΔQx​​×ΔPy​Py​​Exy​=ΔPy​ΔQx​​×Qx​Py​​where:Qx​=Quantity of good XPy​=Price of good YΔ=Change​

## Understanding Cross Elasticity of Demand

In economics, the cross elasticity of demand refers to how sensitive the demand for a product is to changes in the price of another product.

### Substitute Goods

The cross elasticity of demand for
substitute goods is always positive because the demand for one good increases when the price for the substitute good increases. For example, if the price of coffee increases, the
quantity demanded for tea (a substitute beverage) increases as consumers switch to a less expensive yet substitutable alternative. This is reflected in the cross elasticity of the demand formula, as both the numerator (percentage change in the demand of tea) and denominator (the price of coffee) show positive increases.

Items with a coefficient of 0 are unrelated items and are goods independent of each other. Items may be weak substitutes, in which the two products have a positive but low cross elasticity of demand. This is often the case for different product substitutes, such as tea versus coffee. Items that are strong substitutes have a higher cross-elasticity of demand. Consider different brands of tea; a price increase in one company’s green tea has a higher impact on
another company’s green tea demand.

Toothpaste is an example of a substitute good; if the price of one brand of toothpaste increases, the demand for a competitor’s brand of toothpaste increases in turn.

### Complementary Goods

Alternatively, the cross elasticity of demand for complementary goods is
negative. As the price for one item increases, an item closely associated with that item and necessary for its consumption decreases because the demand for the main good has also dropped.

For example, if the price of coffee increases, the quantity demanded for coffee stir sticks drops as consumers are drinking less coffee and need to purchase fewer sticks. In the formula, the numerator (quantity demanded of stir sticks) is negative and the denominator (the price
of coffee) is positive. This results in a negative cross elasticity.

## Usefulness of Cross Elasticity of Demand

Companies utilize the cross elasticity of demand to establish prices to sell their goods. Products with no substitutes have
the ability to be sold higher prices because there is no cross-elasticity of demand to consider. However, incremental price changes to goods with substitutes are analyzed to determine the appropriate level of demand desired and the associated price of the good.

Additionally, complementary goods are strategically priced based on the cross elasticity of demand. For example, printers may be sold a loss with the understanding that the demand for future
complementary goods, such as printer ink, should increase.

## What Does the Cross Elasticity of Demand Measure?

Cross elasticity of demand evaluates the relationship between two products when the price in one of them changes. It shows the relative change in demand for one product as the price of the other rises or falls.

## What Does a Positive Cross Elasticity of Demand Indicate?

A positive cross
elasticity of demand means that the demand for good A will increase as the price of good B goes up. This means that goods A and B are good substitutes. so that if B gets more expensive, people are happy to switch to A. An example would be the price of milk. If whole milk goes up in price, people may switch to 2% milk. Likewise, if 2% milk rises in price instead, whole milk becomes more in demand.

## What Does a Negative Cross Elasticity of Demand Indicate?

A negative cross elasticity of demand indicates that the demand for good A will decrease as the price of B goes up. This suggests that A and B are complementary goods, such as a printer and printer toner. If the price of the printer goes up, demand for it will drop. As a result of fewer printers being sold, less toner will also be sold.

## How Does Cross Elasticity of Demand Differ From Demand Elasticity?

Cross elasticity looks
the proportional changes in demand among two goods. Demand elasticity (or price elasticity of demand) by itself looks the change in demand of a single item as its price changes.

## How Does Cross Elasticity of Demand Differ From the Cross Elasticity of Supply?

In contrast
to changes in demand of two goods in response to prices, the cross elasticity of supply measures the proportional change in the quantity supplied or produced in relation to changes in the price of a good.

### How does change in price affect complementary goods?

If the price of one good increases, the market will decrease for both complementary products. The closer the products are to it, the higher will the cross elasticity of demand be. If they are weak complementary goods, then demand will be low on cross-elasticity.

### Which is an example of complementary goods affecting demand?

Definition of Complementary Goods
For example, the demand for one good (printers) generates demand for the other (ink cartridges). If the price of one good falls and people buy more of it, they will usually buy more of the complementary good also, whether or not its price also falls.

### What is complementary goods with example?

A complementary good is a product or service that provides value to another product or service. In other words, they are two things that the customer utilises in conjunction with one another. Cereal and milk, for example, or a DVD and a DVD player.

### What are complementary goods explain its impact on demand?

When two goods are complements, they experience joint demand – the demand of one good is linked to the demand for another good. Therefore, if a higher quantity is demanded of one good, a higher quantity will also be demanded of the other, and vice versa.
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