Editing Substitute good (section)

== Cross elasticity of demand  ==
The fact that one good is substitutable for another has immediate economic consequences: insofar as one good can be substituted for another, the [[demand]]s for the two goods will be interrelated by the fact that customers can trade off one good for the other if it becomes advantageous to do so. Cross-price elasticity helps us understand the degree of substitutability of the two products. An increase in the price of a good will increase demand for its substitutes, while a decrease in the price of a good will decrease demand for its substitutes, see Figure 2.<ref>{{Cite book|url=https://open.umn.edu/opentextbooks/textbooks/macroeconomics-theory-models-policy|title=Macroeconomics: Theory, Models & Policy|last1=Curtis|first1=Douglas|last2=Irvine|first2=Ian|date=2017|publisher=Lyryx Learning|edition=Revision A|pages=67|access-date=20 August 2019}}</ref>

[[File:Substitute good chart.jpg|thumb|433x433px|Figure 2: Graphical example of substitute goods]]

The relationship between [[Demand curve|demand schedules]] determines whether goods are classified as substitutes or complements. The [[Cross elasticity of demand|cross-price elasticity of demand]] shows the relationship between two goods, it captures the responsiveness of the quantity demanded of one good to a change in price of another good.<ref>{{Cite web|title=Other Demand Elasticities {{!}} Boundless Economics|url=https://courses.lumenlearning.com/boundless-economics/chapter/other-demand-elasticities/|access-date=2020-10-13|website=courses.lumenlearning.com}}</ref>

Cross-Price Elasticity of Demand (''E''<sub>x,y</sub>) is calculated with the following formula:

''E''<sub>x,y</sub> = Percentage Change in Quantity Demanded for Good X  '''<big>/</big>'''  Percentage Change in Price of Good Y

The cross-price elasticity may be positive or negative, depending on whether the goods are complements or substitutes. A substitute good is a good with a positive cross elasticity of demand. This means that, if good <math>x_j</math> is a substitute for good <math>x_i</math>, an increase in the price of <math>x_i</math> will result in a leftward movement along the demand curve of <math>x_i</math> and cause the demand curve for <math>x_j</math> to [[Demand curve#Changes that increase demand|shift out]]. A decrease in the price of <math>x_i</math> will result in a rightward movement along the demand curve of <math>x_i</math> and cause the demand curve for <math>x_j</math> to [[Demand curve#Changes that decrease demand|shift in]]. Furthermore, perfect substitutes have a higher cross elasticity of demand than imperfect substitutes do.