cross elasticity of demand

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Microeconomics

12th

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10 Terms

1
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XED definition
a measure of how the quantity demanded of one good responds to a change in the price of another good.
2
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XED formula
(%change in QD of GOOD A)/(%change in P of GOOD B)
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positive XED
substitutes
4
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negative XED
complements
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XED of strong complements
XED < -1
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XED of strong substitutes
XED > 1
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XED of weak complements
XED between 0 and -1
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XED of weak substitutes
XED between 0 and 1
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why is XED significant for firms (complements)
- firms could bundle them and sell them as packages
- take over businesses that sell the complements
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why is XED significant for firms (substitutes)
- use brand proliferation to weaken the degree of substitutability : incr brand loyalty so they are unaffected by other brands
- know to engage in advertising or brand wars