Cross elasticity of demand (XED)

What is the formula of XED

% change in QD of good A/ % change in the price of good B

When interpreting the XED results what should you consider?

• whether the result is positive or negative

• The size/ magnitude of the figure

What is the XED of substitutes?

Positive XED

If price of good A e.g apples rises, QD of good B e.g bananas rises

If price of good A e.h apples falls, QD of good B e.g bananas falls

What is the XED of complements?

Negative XED

If price of good A e.g Xbox rises, QD of good B e.g Xbox games falls

If price of good A falls QD of good B rises

When is there no relationship between the 2 goods?

XED=0

If price of good A e.g cars rises, QD of good B e.g boy rack would not be affected

What is the magnitude of the figure if the XED is greater then 1?

If the XED is greater than 1 the demand for one good is cross elastic in response to a change in the price of another good

When is the demand for good cross elastic?

If the XED is greater than 1 (close substitute or less then -1 (close complements), the demand for one good is cross elastic in response to a change in the price of another

When is the demand for good cross inelastic?

If the XED is between 0 and 1 (weak substitutes) or between 0 and -1 (weak complements) the demand for one good is cross inelastic in response to a change in the price of another

What are the characteristics of a strong substitute?

Positive XED, above 1

What are the characteristics of a A weak substitute?

Positive XED, below 1

What are the characteristics of a strong complement?

Weak XED, above -1 e.g -2

What are the characteristics of a weak complaint?

Weak XED, below -1

What is the magnitude of the figure if the XED is less then 1?

if the XED is less than 1 the demand for one good is cross inelastic in response to a change in the price of another good