Answer to Question #239006 in Microeconomics for RAME

Question

Cross price elasticity of demand and the relations between the two products

Answer 1

Cross price elasticity of demand and the relations between the two products

The concept of cross price elasticity of demand evaluates the relationship that exists between two products that can either be complementary or exhibit substitution scenario. The concept shows how the change in demand of one product may affect the price of the other. 

Cross elasticity can be either positive or negative, when it is negative the two products are compliments and under such scenario, an increase in the price of the first product leads to a decrease in the demand for the other product. The cross elasticity can also be positive for products that are substitutes and in this case , a reduction in the price for product one leads to increase in demand for product two.