Final answer:
Cross-price elasticity of demand helps determine whether two goods are substitutes or complements based on how the quantity demanded of one good changes with a price change of the other. Positive elasticity indicates substitute goods and negative indicates complements.
Step-by-step explanation:
The cross-price elasticity of demand is a measure used in economics to show how the quantity demanded of one good changes when the price of another good changes. Specifically, if two goods are substitute goods, like coffee and tea, an increase in the price of one will lead to an increase in the quantity demanded of the other, resulting in a positive cross-price elasticity. Conversely, if two goods are complement goods, such as coffee and sugar, an increase in the price of one will lead to a decrease in the quantity demanded of the other, resulting in a negative cross-price elasticity.
By analyzing this relationship, one can determine the nature of goods in relation to each other. Positive cross-price elasticity indicates substitute goods, while negative cross-price elasticity indicates complement goods. This economic measure is crucial for businesses when strategizing pricing and for economists when assessing market conditions.