A2. Cross-Price Elasticity. Cross price elasticity of demand is a measure of how sensitive buyers are to a change in the price of one good and its effect on another good. It is important to businesses and government to measure the substitutability or complementarity response of goods to cross pricing changes among these goods to know the elasticity response and when to lower a price or increase it to control the supply flow and protect total revenue results.
This change will be positive, all things equal, if they are substitute goods. Positive when the goods are substitute being two different brands of the same item, we will use eggs brand A and eggs brand B for our example. If eggs brand A price increases the demand will increase for eggs brand B and buyers will buy a larger quantity of eggs brand B to show the positive sensitivity to price for eggs. The cross price is also positive when the price decreases for eggs brand A, all things equal, or eggs brand B stays the same, then buyers will purchase larger quantities of eggs brand A. We call this the substitution effect (Tomlinson, 2011). Complementary goods have negative cross price elasticity. Complementary goods are products or services that are used together such that when the price of one complement good falls, the demand for the other or complement good increases. We could use for an example Polaroid cameras and Polaroid film for our complement goods. If there is a decrease