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Substitute goods have positive cross price elasticity, while complementary goods have negative cross price elasticity.
Economics classifies goods on the basis of various characteristics, viz., luxury goods, essential goods, substitute goods, Giffen goods, etc. These goods have various price elasticity demands. ‘Willingness to pay’ is a terminology that defines how much quantity a customer is willing to buy at a given price level.
Price elasticity measures the degree of variance in the quantity demanded, in response to the change in price of a product. Price elasticity of any product is influenced by many factors such as technology, fashion, industry, economic conditions of the nation, rate of inflation, resource availability, etc. Cross price elasticity measures the impact on the demand of a good in response to the change in price of any other good. This Buzzle article talks in depth about the complementary and substitute goods, the difference between them, and their cross price elasticity.
What are Substitute Goods?
Continue reading Meaning of Substitute and Complementary Goods in Economics With Examples
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