c) Cross price elasticity of demand

a) understanding of cross price elasticity of demand

b) use formulae to calculate cross price elasticities of demand

c) interpret numerical values of cross price elasticity of demand: substitutes, complementary, and unrelated goods

d) the factors influencing elasticities of demand

cross price elasticity of demand = how responsive a change in quantity demanded for good A is to a change in price for good B

XED = (%ΔQDA) / (%ΔPB)

• cross price elasticity of demand = percentage change in quantity demanded for good A / percentage change in price for good B

if XED < 0

• the two goods are complements

  • strong complements = high XED + more elastic demand

    • increase in the price of good B → decrease in the quantity demanded for good A

    • gradient = negative

if XED = 0

• the two goods are unrelated

  • change in the price of good B → no change in the quantity demanded of good A

  • gradient = 0 (perfectly vertical)

if XED > 0

• the two goods are substitutes

  • strong substitutes = high XED + more elastic demand

    • increase in the price of good B → increase in the quantity demanded for good A

    • gradient = positive