Cross Elasticity of demand

This measures the % change in QD for a good after the change in price of another.

            XED = % change in QD good A
                        % change in price good B

 for example if there is an increase in the price of tea by 10% and QD of coffee increases by 2%, then XED =             +0.2

Substitute goods are alternative. There XED will be positive,

• The weak substitutes like tea and coffee will have a low XED.
• Tesco bread and Sainsburys bread are close substitutes so XED is higher

 

Complements goods, these are goods which are used together, therefore XED is negative.

• If the price of DVD players fall, then there will be a increase in demand for DVD disks,
• When setting prices firms will have to look at what alternatives the consumer has, if there are no close substitutes they will be able to increase the price. For this reason firms spend a lot of money on advertising to differentiate their products.

 

Essays and Revision Notes on Supply and Demand

• Demand
• Supply
• Market Equilibrium
• Price Mechanism Long Term
• Demand and Utility
• Consumer and Producer Surplus

Elasticity

• Price Elasticity of Demand
• Income Elasticity of Demand
• Cross Elasticity of Demand
• Price Elasticity of Supply