A negative cross elasticity of demand between two goods indicates they are

• A. complements.
• B. substitutes.
• C. unrelated.
• D. identical.

Answer: (A)

A negative cross elasticity of demand means the two goods are complements. This sign shows that when the price of one good rises, the quantity demanded of the other falls as well, because they are typically used together. For example, when the price of printers rises, fewer people buy printers and, consequently, fewer ink cartridges are demanded, illustrating the complementary relationship.

If the cross elasticity were positive, the goods would be substitutes—an increase in the price of one would raise the demand for the other as consumers switch to the cheaper alternative. If the cross elasticity were zero, the goods would be unrelated, showing little or no reaction in the quantity demanded of one when the price of the other changes. Identical or perfectly substitutable goods aren’t described with a negative cross elasticity in practice; the relationship would be either very strong and positive or not meaningful in terms of cross price effects.