Cross elasticity of demand in the context of "Complementary good"

Play Trivia Questions online!

or

Skip to study material about Cross elasticity of demand in the context of "Complementary good"

Ad spacer

>>>PUT SHARE BUTTONS HERE<<<

👉 Cross elasticity of demand in the context of Complementary good

In economics, a complementary good is a good whose appeal increases with the popularity of another good, its complement. Technically, it displays a negative cross elasticity of demand and that demand for it increases when the price of another good decreases. If is a complement to , an increase in the price of will result in a negative movement along the demand curve of and cause the demand curve for to shift inward; less of each good will be demanded. Conversely, a decrease in the price of will result in a positive movement along the demand curve of and cause the demand curve of to shift outward; more of each good will be demanded. This is in contrast to a substitute good, whose demand decreases when its substitute's price decreases.

When two goods are complements, they experience joint demand - the demand of one good is linked to the demand for another good. Therefore, if a higher quantity is demanded of one good, a higher quantity will also be demanded of the other, and vice versa. For example, the demand for razor blades may depend on the number of razors in use; this is why razors have sometimes been sold as loss leaders, to increase demand for the associated blades. Another example is that sometimes a toothbrush is packaged free with toothpaste. The toothbrush is a complement to the toothpaste; the cost of producing a toothbrush may be higher than toothpaste, but its sales depends on the demand of toothpaste.

↓ Explore More Topics
In this Dossier

Cross elasticity of demand in the context of Independent goods

Independent goods are goods that have a zero cross elasticity of demand. Changes in the price of one good will have no effect on the demand for an independent good. Thus independent goods are neither complements nor substitutes.

For example, a person's demand for nails is usually independent of his or her demand for bread, since they are two unrelated types of goods. Note that this concept is subjective and depends on the consumer's personal utility function.

↑ Return to Menu