Introduction

Select the correct terms in brackets:

Coupled with the application for a merger between the Coca-Cola and Pepsi Cola companies, the Coca-Cola company also applies for a merger with the True Blue Brandy company. Bob knows Coca-Cola and brandy are complements and will therefore have a (positive/negative) cross-elasticity.

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Coca-Cola and brandy are complements and will therefore have a negative cross-elasticity.

Complementary goods have negative cross-elasticities: If good A is a complement for good B, like coffee and sugar, then a higher price for B will mean a lower quantity consumed of A. As with substitutes, the size of the cross-elasticity of demand between two complements tells us how closely they are associated. If the cross-elasticity is only slightly below zero, they are weak complements; and if it is a large negative number, they are strong complements.

For example, cell phones and airtime are strong complements and therefore have a large negative value.

Note that the sign (plus or minus) is important as it tells us whether the two goods are complements or substitutes and cannot be ignored as we did in the case of the price elasticity of demand.

Unrelated goods

Select the correct terms in brackets:

To his surprise, Bob notices a third application from the Coca-Cola Company applying for a merger with the Sticky Tyre Company. Bob is pretty sure that Coca-Cola and tyres are neither complements nor substitutes, but cannot figure out what he should write in his report. Can you help him? They are

  • complements.
  • substitutes.
  • independent goods.
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Coca-Cola and tyres are independent goods and are not related.