Economics

Cross Demand Curves For Substitutes And Complementaries

Cross demand: Cross demand is an important type or demand. It denotes the relationship between changes in the quantity demanded of commodity due to the price changes in its related goods. Substitutes and complementaries are the related goods of a commodity.

Cross demand curve in the case of substitutes : In the case of substitutes the cross demand curve slopes upwards from left to right. A change in the price of one of the two commodities leads to a change in the quantity demanded of another commodity which is a close substitute for it. For example coffee and tea are two close substitutes. When the price of coffee increases, demand for tea increases even though its price remains the same. This may be explained with the help of the following diagram. cross demand curve for substitutes

In the above diagram quantity demanded of Tea (Y) is shown on OX axis. The price of coffee (X) is represented along OY axis. DD is the demand curve for substitutes. It slopes upwards from left to right. At first when the price of coffee is OPx, people  purchase OY1 quantity of Tea (Y). But when the price of coffee increase from OPx to OPx1, the demand for tea increases OY1 to OY2. This is due to substitution effect. Hence the cross demand curve in the case of substitutes slopes upwards from left to right.

Cross demand curve in the case of Complementaries: Complementaries are those goods which are needed by the consumers for satisfying a single want. Car and petrol, shoes and socks etc. are some of the examples of complementaries. These goods have joint demand. For example, the demand for socks depends not only on its price but also on the price of the shoes. When the price of shoes fall, the demand for socks will increase. Demand curve in the case of complementaries slopes downwards from left to right. This is shown from the following diagram : cross demand curve for complementaries

As shown above, the price of shoes (X) and the demand for socks (Y) are shown along OY and OX axes respectively. DD is the cross demand curve for complementaries. It slopes downwards from left to right. In the above diagram, when the price of shoes is OPx1, the demand for socks is s OY1. When the price of shoes decreases from OPx1 to OPx, demand for socks increases
from OY1 to OY2.

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