Question

Assume the price of X increases/decreases. Graph the outcomes in the following cases:

A. X and Y are substitutes.

B. X and Y are complements.

C. X and Y are neither substitutes nor complements.

Answer 1

A. X and Y are substitutes

Substitutes are those goods which are demanded alternatively, because both the products are used to fulfil a similar want like tea and coffee. So when price of X increases, consumer will substitute the quantity of X with the Quantity of Y, whose price remains constant. So there exists a positive relation between the price of X with quantity of Y, when both are substitute to each other. Moreover the cross elasticity among substitute goods are also positive.

In the above diagram with the increase in the price of X from P to P2 has resulted in increase in the quantity demand for Y from Q to Q2. Likewise with a decrease in price from P to P1 has resulted in decrease in quantity from Q to Q1.

B. X and Y are complementary

Complementary are those goods which are demanded jointly, because without one another can’t be used or they are used along with other. Like car and petrol. so when price of X increases, consumer will not only demand less quantity of X but also demand less Quantity of Y. So there exists an inverse relation between the price of X with quantity of Y, when both are complementary to each other. Moreover the cross elasticity among complementary goods are also negative.

In the above diagram with the increase in the price of X from P to P2 has resulted in decrease in the quantity demand for Y from Q to Q2. Likewise with a decrease in price from P to P1 has resulted in increase in quantity from Q to Q1.

C. X and Y are neither substitutes nor complements

When good X and good Y are neither substitutes nor complements, it means they are unrelated goods. So there exists no relation between the prices of X with quantity of Y. In other words in case of unrelated goods the increase or decrease in price X does not have any effect on the quantity demanded for Y , so the cross elasticity among unrelated goods are also zero.

In the above diagram with the increase in the price of X from P to P2 and decrease in price from P to P1 has resulted no change in quantity demanded for goods Y. The quantity demand for Good Y is Q , which is unaffected by the change in price of Good X