Business Economics -I (B.Com) 1st Sem Previous Year Solved Question Paper 2022

Cross elasticity of demand is an economic concept that measures how the quantity demanded of one good (or service) responds to a change in the price of another related good. It quantifies the responsiveness of consumer demand for one product when the price of another product changes. Cross 
elasticity of demand can be classified into two main categories:

1. Substitute Goods (Positive Cross Elasticity): If an increase in the price of one good leads to an increase in the quantity demanded of another good, they are considered substitute goods, and the cross elasticity of demand is positive. This indicates that consumers are likely to switch from 
one good to the other when prices change in a certain way.

2. Complementary Goods (Negative Cross Elasticity): If an increase in the price of one good leads to a decrease in the quantity demanded of another good, they are considered complementary goods, and the cross elasticity of demand is negative. This suggests that these goods are typically consumed together, and when the price of one rises, demand for the other falls.

For example, if the cross elasticity of demand between coffee and tea is +0.6, it means that a 1% increase in the price of tea leads to a 0.6% increase in the quantity of coffee demanded, indicating that coffee and tea are substitutes.Understanding cross elasticity of demand is important for businesses and policymakers, as it helps predict how changes in the price of related goods will affect consumer choices and market dynamics.