2.6 cross elasticity of demand Flashcards
(9 cards)
what is XED
the responsiveness of demand of one good to changes in the price of a related good (either substitute or complementary) over a specific period of time
how to calculate XED
% change in quantity demanded of good A / % change in price of good B
what can XED also be seen as
CED
if a good is complimentary what will the result of XED be
it will have a negative sign (inverse relationship between the two)
if a good is substitute what will the result of XED be
it will have a positive sign (positive relationship between the two )
what are perfect compliments
must be bought together
e.g pencil and eraser
what are base good and complementary good example
the base good is a printer and the complimentary good is the ink cartidges
if XED is greater than 1
the good is cross price elastic
bigger change in QD as consumers are more responsive to the price change
if XED is smaller than 1
the good is cross price inelastic
not a huge change in QD as consumers are less responsive to the price change
