Substitues and Complements Flashcards
1
Q
What is the link between the relationship between products and cross-price elasticity?
A
The stronger the relationship between two products, the higher is the co-efficient of cross price elasticity of demand.
2
Q
What are the main differences between substitutes and complements?
A
Substitute goods are consumed in place of each other where complement goods are consumed together.
3
Q
How can you determine whether the goods are substitutes using cross-price elasticity of demand?
A
If the cross-price elasticity is positive, then the goods are substitutes.
4
Q
What is the formula for cross-price elasticity of demand?
A
XED = %DQ (Good A) / %DP (Good B)
5
Q
Are complements positive or negative?
A
Negative.
6
Q
Are substitutes positive or negative?
A
Positive.
