Understanding cross-price elasticity (CPE) is important for Year 12 students studying economics. CPE looks at how the demand for one product changes when the price of another product changes.

Let’s break this down:

Key Concepts:

1. Formula:
   CPE can be shown with this formula:
   $CPE = \frac{\% \Delta Q_d^A}{\% \Delta P^B}$
   Here, $Q_d^A$ is how much of Good A people want, and $P^B$ is the price of Good B.

2. Interpretation:

   • Substitutes (CPE > 0):
     If the price of Good B goes up, people will buy more of Good A.
     For example, if the price of tea increases by 10%, the demand for coffee might go up by 5%.

   • Complements (CPE < 0):
     If the price of Good B goes up, people will buy less of Good A.
     For instance, if the price of printers goes up by 10%, the demand for ink cartridges might drop by 15%.

By understanding these points, students can better look at how the market works and how people decide to buy things.