Substitutes and Complements: 

The demand for a good is influenced by the presence or absence of substitutes and complements. The prices of substitutes and complements are among the determinants of demand, and influence how much of a good people buy. A substitute is something that can be used instead of a particular good or service. For example, beef can be substituted for chicken. If the price of chicken increases relative to the price of beef, people will buy more beef.

Goods that are substitutes satisfy the same set of goals or preferences. The more substitutes there are and the less difference there is between the substitutes, the more sensitive the demand for a good will lead to changes in price. In other words, it is the presence of substitutes that determines whether the demand for a good will be elastic or inelastic. With substitute goods such as brands of cereal or washing powder, an increase in the price of one good will lead to an increase in demand for its substitute(or rival). Therefore the cross price elasticity for two substitutes will be positive.

Complements are goods which are used in combination with one another. Peanut butter and jelly are complementary items. If the price of peanut butter goes up, people will buy less peanut butter and less jelly because peanut butter and jelly are typically purchased together. Cheese and butter are complements to bread, and if their price falls, the demand for bread may increase. With goods complementary goods such as DVD players and DVD videos, when there is a decrease in the price of DVD players, there will be an increase in the demand for DVD players bought, leading to an increase in market demand for DVD videos. The cross price elasticity of demand for two complements is negative.