ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If two goods are substitutes then they have a positive XED calculation. If Good B increases in price, then the demand for Good A will increase. This is because these two goods are competiting with one another. If the price of a Playstation goes up then more people will want to buy Xboxes.

Detailed explanation-2: -Substitutes have a positive cross price elasticity of demand. (I.e. XED > 0) which means that an increase in the price of one product will lead to a rise in demand for a substitute. Complements are goods or services in joint demand. Cross price elasticity of demand (XED) for two complements will be negative.

Detailed explanation-3: -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.

Detailed explanation-4: -When XED is positive, the related goods are substitutes. For example, if the price of Coca Cola increases from 50p to 60p per can, and the demand for Pepsi Cola increases from 1m to 2m per year, the XED between the two products is: + 100 + 20 = (+) 5.0.

Detailed explanation-5: -Cross Price Elasticity of Demand is used to determine the relationship between two goods. Recall that one reason for demand changes is the price of related goods. Goods can be compliments (used together) or substitutes (you will choose one or the other, but not both).