Cross elasticity of demand-Explanation with examples

Types of cross elasticity of demand :

1. Substitute Goods
2. Complementary Goods
3. Unrelated Goods

1. Substitute goods:

When the cross elasticity of demand for good X relative to the price of good Y is positive, it means the goods X and Y are substitutes to each other. It implies that in response to an increase in the price of good Y, the quantity demanded of good X has increased as people start consuming product X as the price of good Y goes up.

For example, suppose a 10% increase in the price of tea results in an increase in demand for coffee by 15%. This shows that the goods are substitutes for each other.

2. Complementary goods:

When the cross elasticity of demand for good X relative to the price of good Y is negative, it means the goods are complementary to each other. It implies that in response to an increase in the price of good Y, the quantity demanded of good X has decreased due to the increase in the price of Y.

For example, suppose the 10% increase in the prices of Android phones results in a decline in the quantity demanded of Apps by 15%. This relation shows that the goods are complementary to each other.

3. Unrelated goods:

When the cross elasticity of demand for good X relative to the price of good Y is zero, it means goods are unrelated to each other. It implies that there is no relationship between these both goods.

 For example, suppose the 5% increase in the prices of coke results in no change in quantity demanded of butter. This shows that the goods are unrelated to each other.