(Economics A-level) Is the cross elasticity of demand for tea likely to be positive or negative following a rise in the price of milk? Explain your answer

Let's first break down the concepts involved in this question. Price elasticity of demand is the responsiveness of the quantity of a good demanded to changes in the price of that good. Cross price elasticity of demand for tea with respect to milk is the responsiveness of the quantity of tea demanded when the price of milk changes. Tea and milk are good examples of economic complements: people like to consume them together and in set proportions. Hence when milk becomes more expensive people will be able to afford less milk, and so will not demand as much tea since they don't like to consume tea without milk. Hence the cross elasticity of tea when the price of milk changes is negative

Answered by Dylan G. Maths tutor

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