CA Foundation · Business Economics · Theory of Demand and Supply
A rise in the price of cars in India is expected to reduce the demand for petrol. In economic terms, petrol and cars are:
Cars and petrol are complements with negative cross elasticity. When the price of cars rises, fewer cars are bought and so less petrol is demanded. Opposite movement of one good's price and the other's quantity demanded indicates complementary goods.
- ASubstitutes, with positive cross elasticity
- BComplements, with negative cross elasticityCorrect
- CUnrelated goods, with zero cross elasticity
- DSubstitutes, with negative cross elasticity
Explanation
The price of cars rises and demand for petrol falls, so the two move in opposite directions. This gives negative cross elasticity, which is characteristic of complements, goods used together. Substitutes would show positive cross elasticity.
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