The responsiveness of the quantity demanded for one product to a change in the price of another related product is measured by a specific economic calculation. This calculation reveals whether goods are substitutes, complements, or unrelated. For example, if the price of coffee increases, and as a result, the demand for tea rises, this indicates a positive relationship, suggesting tea and coffee are substitute goods. The magnitude of the change in demand relative to the price change provides a precise measure of this relationship.
Understanding the relationship between products is vital for businesses in several respects. It assists in informed pricing strategies, inventory management, and competitive analysis. Businesses can predict shifts in consumer demand and adjust their operations accordingly by assessing how changes in the price of a competitor’s product affect the demand for their own. This enables them to optimize revenue, manage risk, and maintain a competitive edge within the market. Historically, this understanding has evolved from simple market observation to a quantitative analysis method providing businesses with crucial insights into consumer behavior.
