If a price of a good increase, consumers may switch to a cheaper substitute, therefore big quantity of demanded decreases.If there is no close substitutes, when price increases, consumers cannot switch to its substitute goods, therefore a small quantity of demanded decreases.
If a price of a good increase, consumers may switch to a cheaper substitute, therefore big quantity of demanded decreases.
Some products, such as coffee and radio which are not connected.
A rise in price for each of the product will not effect the demand between the products.
Thus, the value of cross elasticity demand of two products would be zero.
Firms have to aware of the change in price of the substitutes goods or complement goods which may effect the quantity demanded for their products.
This is because the consumers may switch to a more cheaper price of good which is a close substitute.
Products that are very close substitutes will have a higher positive value than products that are not so close.
Price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price.
The inverse relationship between the price and the quantity demanded gives a negative value for price elasticity demand.
Complement goods have negative sign because they have indirect relationship between the two goods.
For example, computer gaming machine and games are very close complements for consumers.