Cross elasticity of demand

What does XED measure

the responsiveness of quantity demanded of a good/service given a change in price of another good

XED calculation

% change Qd (A) / % change Price (B)

Percentage change

difference / original x 100

What is the relationship between price and QD for substitutes?

Positive: Price up, QD up; Price down, QD down.

What is the relationship between price and quantity demanded (QD) for complements?

Negative: Price up, QD down; Price down, QD up.

What does it mean if elasticity between goods is >1?

Demand is price elastic: QD changes proportionately more than the price.

What does it mean if elasticity between goods is <1?

Demand is price inelastic: QD changes proportionately less than the price.

What does it mean if elasticity between goods is 0?

Perfectly inelastic: No relationship between the goods.

What is an example of goods with no relationship (elasticity = 0)?

Printers and shoes: Price of printers doesn’t affect QD of shoes.

What is the sign of the relationship for substitutes?

Positive (+): Price and QD move in the same direction.

What is the sign of the relationship for complements?

Negative (-): Price and QD move in opposite directions.

What mnemonic helps remember substitutes and complements?

Party, Season, Near, Christmas

Party

Positive

Season

Substitutes

Near

Negative

Christmas

Complement

What should we focus on after identifying the sign of the relationship?

Ignore the sign and evaluate the raw number:

What relation is XED >1

Strongly related.

What relation is <1

Weakly related

What relation is 0

No relationship

Draw a Substitute diagram

Draw a complement diagram

For Complements a shallow downward sloping demand curve means

e.g: As Price of razors decrease, Qd of Razor blade increases proportionally more than the decrease in price of razors

For complements a steep downward sloping demand curve means

Example: Price of Razors decrease, Qd of razor blades will increase proportionally less than the fall in price of Razors

What does XED = -2.5 indicate about the relationship between Product A and Product B

The goods are complements and price elastic

What does XED = 1.25 indicate about the relationship between Big Macs and Whoppers

The goods are substitutes and price elastic

What happens to the Qd of a substitute when the price of the other good increases if the goods are price elastic?

The Qd of the substitute increases proportionately more than the price change.

How/s a way of remembering what comes first in an elasticity calculatiuon

Qd / P - You Q (queue) before you P (Pee) as people do in public toilets

What is the relationship between toy cars and teddy bears if the price of toy cars rises by 40% and the demand for teddy bears increases by 20%?

They are substitutes. The increase in the price of toy cars causes the demand for teddy bears to increase.