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substitutes or 
complements
. 
(a) 
If the two goods are 
substitutes, cross elasticity will be positive 
and a fall in the price of one will 
reduce the amount demanded of the other.
(b) 
If the goods are 
complements, cross elasticity will be negative
and a fall in the price of one will 
raise demand for the other. 
For example, assume bread and butter are complements. If the price of bread increases, demand for 
bread and then, in turn, butter will decrease. So, as a fraction, we have a negative value (quantity of 
butter demanded) over a positive value (increase in price) meaning the cross elasticity of demand is 
negative. 
Cross elasticity involves a comparison between two products. The concept is a useful one in the context 
of considering substitutes and complementary products. 
The value of the cross-elasticity of demand shows the strength of the relationship between the two 
goods. Indices tending towards 1 or –1 indicate a strong relationship; statistics tending towards zero 
indicate a weak relationship. 
Cross-elasticity 
Value 
Example 
Perfect complements 
–1 
Complements 
–ve 
Bread and butter 
Unrelated products 
0 
Bread and cars 
Substitutes 
+ve 
White bread and brown bread 
Perfect substitutes 
+1 
Remember that cross elasticity of demand (like other measures of elasticity) measures the 
percentage 
change in the quantity demanded for one good, in response to the 
percentage 
change in the price of 
another. 
4.10 Market demand and the distribution of income
Market demand for a good is influenced by the way in which the national income is shared among 
households.
In a country with many rich and many poor households and few middle income ones, we might expect a 
relatively large demand for luxury cars and yachts and also for bread and potatoes. In a country with 
many middle-income households, we might expect high demand for medium-sized cars and TV sets, 
and other middle income goods.