1.2.3 Cross-Elasticity of Demand

Cross - Elasticity of demand (XED) definition?

Is the measure of the responsiveness of demand for one good X, to change in price of another good Y.

What is the formula for Cross-Elasticity of demand?

What are the determinants of Cross-Elasticity of demand?

• Cross-Elasticity of demand is determined by whether the product is a Substitute or a Complement.

What does a positive XED mean?

A positive XED indicates the goods are substitutes. As the price of Good Y increases, the demand for Good X also increases.

What does a negative XED mean?

A negative XED indicates the goods are complements. As the price of Good Y increases, the demand for Good X decreases.

What is an example of a positive XED?

Price of Coca-Cola ↑

The Demand for Pepsi ↑.

What is an example of a Negative XED?

Price of printers ↑

Demand for ink ↓.

What will close substitute have?

Close substitutes will have a higher XED as consumers demand for good x will be more sensitive to a change in price of good y.

What will close Complement have?

Close complements will have higher XED as consumers demand demand for good X will be more sensitive to a change in price.

What happens when XED is close to 0?

The change in price of good X will have no impact on the demand.

Cross Elasticity Of Demand Qs.

What determines Cross-Elasticity of Demand for Firms?

Firms will attempt to change the Cross-Elasticity of their products as Substitutes and Complements.

How will Firms attempt to change the Cross-Elasticity of their Substitute product?

Firms will try to differentiate their product’s from the Competition.

How will Firms attempt to change the Cross-Elasticity of their Close Substitute product?

A firm with plenty of close substitutes will be less able to increase.

How will Firms attempt to change the Cross-Elasticity of their Complements product?

Firms will produce a range of Complements to accompany their core products and a firm that sells a range of complements is likely to increase total.

XED practice qs)