#### Activity

• Activity 1

The cross-elasticity of two independent or unrelated goods is equal to zero. A change in the price of product A (coke) does not have any effect on the quantity demanded of product B (tyres).

### Suppose the cross-elasticity of demand between two products, A and B, is negative. If the price of product A increases as a result of a decrease in the number of firms supplying the product, the quantity demanded will _____

Incorrect. Think again.

Correct. The key to the question is given in the first sentence: "The cross-elasticity between two products is negative." If the cross-elasticity is negative, we know that the two products must be complements. An increase in the price of product A decreases the quantity demanded of A and the demand for product B decreases. The markets for motor vehicles and tyres can be used as an example: The market for motor vehicles is represented in figure A. The equilibrium price is Pe and the equilibrium quantity demand and supplied is Qe, as indicated by point E. The market for tyres is represented in figure B. The equilibrium price is Pe and the equilibrium quantity demanded and supplied is Qe, as indicated by point E. A decrease in the number of motor vehicle producers shifts the supply curve for vehicles from S to S1. The equilibrium price for motor vehicles increases from Pe to to P1 and the equilibrium quantity demanded and supplied thus decreases from Qe to Q1.

The increase in the price of motor vehicles and the lower quantity demanded leads to a decrease in the demand for tyres, because people buy fewer motor vehicles and therefore fewer tyres. In the market for tyres, the demand curve for tyres shifts to the left from D to D1. This decrease in the demand for tyres due to the increase in the price of motor vehicles causes a decrease in the quantity of tyres demanded from Qe to Q1 and a decrease in the price from Pe to P1.

Incorrect. Think again.

Incorrect. Think again.

### Suppose the cross-elasticity of demand between two products, A and B, is positive. If there is a fall in the cost of producing good B, the quantity demanded will _____.

Incorrect. Think again.

Incorrect. Think again.

Incorrect. Think again.

Correct. The key to the question is given in the first sentence: "The cross-elasticity between two products is positive." If the cross-elasticity is positive, we know that the two products must be substitutes. An increase in the price of product A decreases the quantity demanded of A and the demand for product B increases. The markets for butter and margarine can be used as an example: The market for butter is represented in figure A. The equilibrium price is R9,00 and the equilibrium quantity demanded and supplied is 250 kg, as indicated by point E. The market for margarine is represented in figure B. The equilibrium price is R9,00 and the equilibrium quantity demanded and supplied is 250 kg, as indicated by point E. An increase in the production cost of butter shifts the supply curve for butter from S to S1. The equilibrium price for butter increases from R9,00 per kg to R15,00 per kg, and the equilibrium quantity demanded thus decreases from 250 kg to 150 kg.

Figure A – butter

Figure B – margarine

The increase in the price of butter and the lower quantity demanded therefore leads to an increase in the demand for margarine, because people buy margarine instead of butter. At each price of margarine, more margarine is demanded when the price of butter increases from R9,00 per kg to R15,00 per kg. In the market for margarine, the demand curve shifts to the right from D to D1. This increase in the demand for margarine due to the increase in the price of butter, causes an increase in the quantity of margarine demanded from 250 kg to 300 kg.

• Activity 2

### a. Write down the formula for cross elasticity.

$$\text{Income elasticity of demand } e_y = {\text{% change in quantity demanded } \over \text{% change in income}}$$

### b. Select the appropriate characteristics for a complement good from the following categories:

 Categories
 The demand of one good decreases when the price of another increases. Cross elasticity is negative. ec < 0 The demand of one good increases when the price of another increases. Cross elasticity if positive. ec > 0 The demand of one good does not change when the price of another increases. ec = 0

Complement

 Categories
 The demand of one good decreases when the price of another increases. Cross elasticity is negative. ec < 0

### c. Select the appropriate characteristics for a substitute good from the following categories:

 Categories
 The demand of one good decreases when the price of another increases. Cross elasticity is negative. ec < 0 The demand of one good increases when the price of another increases. Cross elasticity if positive. ec > 0 The demand of one good does not change when the price of another increases. ec = 0

Substitute

 Categories
 The demand of one good increases when the price of another increases. Cross elasticity is positive. ec > 0

### d. Select the appropriate characteristics for an unrelated good from the following categories:

 Categories
 The demand of one good decreases when the price of another increases. Cross elasticity is negative. ec < 0 The demand of one good increases when the price of another increases. Cross elasticity if positive. ec > 0 The demand of one good does not change when the price of another increases. ec = 0

Unrelated good

 Categories
 The demand of one good does not change when the price of another increases ec = 0