Cross elasticity of demand is the measure of responsiveness of
quantity demanded in good A due to the change in price in good B. In this case,
good B is the complementary good of good A. Good A is car, and good B is gas. Complementary
goods have an inverse relationship with the good itself, when the price of
complementary good increases, in this case is the gas, this will cause the
quantity demanded for cars to decrease.
In the diagram above, it shown that the price of the complementary good which is gas, increases from P3 to P4 and causes the quantity demanded to decrease from Q3 to Q4.
The diagram aboveshows the demand curve of
cars which shifts from D1 to D2 due to the rise in price of gas, at a fixed price of P1. The quantity demanded
also decreases from Q1 to Q2.
This clearly shows the inverse
relationship between complementary goods and the good itself. When the price of
gas increases, the quantity demanded for cars decreases.
Why does the demand curve shift to the left in diagram 2?
ReplyDeleteAs I mentioned in the post. The graph shifted to the left is due to the rise in price of gas at a fixed price of P1 and the quantity demanded also decreases from Q1 to Q2.
DeleteYou are mentioning about complementary goods have an inverse relationship with the goods itself. I would like to ask what if the gas price increases and the quantity demanded for cars remain the same? How do you explain towards this situation?
ReplyDeleteUnless the cars you mentioned is sort of limited luxury car like Bugatti and so on. I am sure only luxury car lovers wouldn't mind to pay more on the car petrol. If not it is quite impossible for that situation to occur because if the gas price keep on increasing, it will only bring more burden to people.
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