What is Cross Demand?
By keeping other things constant, the relationship between the demand for a given commodity and the price of related commodities is known as Cross Demand. In simple terms, cross demand helps in knowing how much quantity of a given commodity will be demanded at different price levels of a related commodity (substitute good or complementary good). Cross Demand can be expressed as:
Dx = f(Py)
Where,
Dx = Demand for the given commodity
f = Functional Relationship
Py = Price of the related commodity (substitute or complementary)
Cross Demand can be either Positive or Negative
- In the case of substitute goods, cross demand is positive. It is because the demand for a given commodity varies directly with the prices of substitute goods.
- In the case of complementary goods, cross demand is negative. It is because the demand for a given commodity varies inversely with the prices of complementary goods.
Substitute Goods and Complementary Goods
Substitute Goods and Complementary Goods are two economic concepts describing the relationship between two or more different products in terms of their demand and consumption patterns. Substitute goods are the goods that can be used in place of one another; however, Complementary goods are the goods that can be used together. It is essential to understand the relationship between substitute goods and complementary goods, especially for organisations and policymakers. It is so because the relationship between these goods helps businesses and policymakers in predicting consumer behaviour, setting prices, and developing marketing strategies.
Geeky Takeaways:
- Substitute Goods are those goods which are used in place of one another to fulfill a specific need or want. For example, Coke and Coca-Cola.
- Complementary Goods are those goods which are used together to fulfill a specific need or want. For example, TV and remote.
- Cross Demand helps in determining the demand of a given commodity when the price of other related commodities changes.
- A commodity’s demand is only affected by a change in the price of related goods and not the price of unrelated goods.
Table of Content
- What are Substitute Goods?
- What are Complementary Goods?
- Difference between Substitute Goods and Complementary Goods
- What is Cross Demand?
- Cross Price Effect on Demand Curve
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