Page 134 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-6: Theory of Demand and Elasticity of Demand

(ii) Negative: Cross Elasticity of demand for complementary goods is negative. Those demands Notes
which are complimentary to each other or those whose demand are joint demands with
proportional increase in price of any object then propositional demand for others decreases. In
this condition cross elasticity of demand is negative. Thus, in this situation before the number
of cross elasticity of demand the sign of Minus (—) is added.

Illustration

Bread and butter is complementary. When the price of bread is 80 paisa then demand of butter is 10 kg.
If the price of bread increases to 1.20 then demand of butter decreases to 5 Kg. Find cross elasticity of
demand of butter.
Cross elasticity of demand of butter can be solved in the following equation
P ∆Q
y
___
E = × ____ x

∆P
Q
c
x y
P = 80 paise; P = 120 paise;
y1
y
∆P = 120 paise – 80 paise = 40 paise
y
Q = 10 kg; Q kg = 5 kg
x x1
∆Q = 5 kg – 10 kg = – 5 kg
x
80 ___
–5
___
E = × = –1

c 10 40
(Here x is used for butter and y is used for bread)
Negative cross Elasticity of Demand can be clarified in Fig. 6.27. In this figure on Ox-axis indicates
quantity of butter and OY-axis shows price of bread. DCDC line indicates cross Elasticity of Demand.
Slope of this line declines from left to right which proves that on increasing price of bread, decrease
demand of butter we know from point E and E that when OP is the price of bread then demand of
1
butter is OQ and when price of bread increases OP, then demand of butter decreases to OQ .
1
(iii) Zero cross Elasticity of Demand: Cross Elasticity of Demand becomes Zero when there is no
relation between them, for example, increase in price of wheat demand would not any effect
on book, therefore cross elasticity of demand will be Zero.
Fig. 6.27
Y
DC
Price of Bread P 1 E 1 Negative Cross Elasticity

P
E
DC
O X
Q Q
1
Quantity of Butter

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