Cross Elasticity of Substitute Goods

Cross elasticity of demand is the measure of how responsive the demand for a good is to the change in the price of another good. In the case of substitute goods, cross elasticity is positive. Let's understand this in detail.

Substitute Goods

Substitute goods are those goods that can be used as an alternative to each other. For instance, tea and coffee are substitute goods as people can consume either of them. If the price of tea increases, people will switch to coffee as it becomes relatively cheaper.

Cross Elasticity of Demand

Cross elasticity of demand is the measure of how responsive the demand for a good is to the change in the price of another good. It is calculated as:

Cross Elasticity of Demand = Percentage Change in Quantity Demanded of Good A / Percentage Change in Price of Good B

If the cross elasticity of demand is positive, it indicates that the two goods are substitute goods. This means that the quantity demanded of one good is directly related to the price of the other good.

For instance, if the price of tea increases, the demand for coffee will increase as people switch to it. In this case, the cross elasticity of demand between tea and coffee is positive.

Conclusion

In conclusion, cross elasticity of demand is positive in the case of substitute goods. This means that the two goods are related, and the demand for one good depends on the price of the other good.