cross elasticity of demand Flashcards
what does XED show?
- how closely related goods are
- whether a good is a complementary or substitute good
- if a business has competition with substitute goods
- tells governments if a business is exploiting the excessive market power
what is cross elasticity of demand (XED)?
it measures how the change in the price of one good affects the quantity of demand for another good
what is a substitute good?
if the price of one good increases, the demand for this good increases, but if the price of one good decreases, the demand for this good decreases
examples of substitute goods
- tea and coffee
- PS4 or Nintendo switch
- Pepsi or coke
- Mcdonald’s or Burger King
what XED value will a substitute good have?
positive value
how to calculate XED?
XED = % change in demand of good x / % change in price of good y
what is a complementary good?
if the price of one good increases, the demand for this good decreases, but if the price of one good decreases, the demand for this good increases
examples of complementary goods
- popcorn and cinema tickets
- printers and ink cartridges
what XED value will a complementary good have?
negative value
