Economics - 1.2.6c - Cross Elasticity of Demand (XED) Flashcards
what is the formula for cross elasticity of demand?
% change in quantity demanded of good X / % change in price of good Y
what is the significance of XED
as one price of a good changes, so does the demand for other goods
businesses can measure how much of a goods demand will be affected by a change in price of another good
What are substitutes
goods where the demand increases as the price of other goods increases
eg Coca Cola and Pepsi
what are complements
goods which have no relation eg toothpaste and ketchup
these goods have no affect on eachother as the change in price of one good doesnt affect the demand of another good
what are the values of XED
positive result = substitute goods
negative result = complement goods
0 result = non-related goods
What are the strengths of the values
numbers between 0 and 1 = weakly related
numbers greater than 1 = strongly related
what is an example of the values
a value of -2.5 = strong complement goods
how do substitutes influence the level of XED
increase in the price of one good means an increase in the demand for substitute goods
Eg Scott found buses are more expensive and is now considering purchasing a car
how do complements influence the level of XED
increase in the price of one good will decrease demand for complement goods
Eg ink is now more expensive so Katie wont purchase a printer
how do non-complement goods influence the level of XED
an increase in the price of one good wont change the demand of another
Eg the price of beans goes up, but Paul still buys the same amount of dishwasher tablets
what is the significance of XED for firms
used by businesses to help them decide what products are complements and substitutes to their own goods
Eg Huawei lowered the price of their new phone meaning google and apple have to find ways to increase sales otherwise they will lose sales
what is the significance of XED for the government
used in competition policy so that governments can see whether firms are interrelated or in different markets
Eg is Lidl a competitor or Aldi or Sainburys
