Question

What is meant by cross price effect? Give two examples to illustrate it.

Answer 1

The way demand the for one particular product is affected by a change in the price of another product is known as the 'cross demand' or 'cross price effect'.

Examples:

1. Substitute Goods (e.g., Tea and Coffee): If the price of tea increases, the demand for coffee (its substitute) increases. This is a positive cross price effect.
2. Complementary Goods (e.g., Petrol and Cars): If the price of petrol increases, the demand for cars (a complement) decreases. This is a negative cross price effect.