1.2.3 - Cross Elasticity of Demand

Question 1

Define Cross Elasticity of Demand (XED)

Answer 1

Measures the responsiveness of quantity demanded of a good to changes in price of ANOTHER good

Question 2

Equation for Cross Elasticity of Demand (XED)

Answer 2

Percentage change in quantity demanded of good X / Percentage change in Price of Good Y

Question 3

Define Substitute goods

Answer 3

. A good which can be replaced by another to satisfy a want

. A rise in price of good X would increase the quantity demanded for good Y. (positive divided by positive is positive)

. A fall in price of good X would decrease the quantity demanded for good Y. (Negative divided by negative is positive)

Examples:
. Coca Cola and Pepsi
. Holiday in Somalia and Holiday in Romania
. India takeaway and Somali takeaway

. Substitute goods have a POSITIVE cross elasticity of demand with each other

Question 4

Define Complementary Goods

Answer 4

. A good that is purchased with other goods to satisfy a want.

. A rise in price of good X would lead to a fall in quantity demanded for good Y (positive divided by negative is negative). A fall in price of good X would lead to a rise in quantity demanded for good X (negative divided by positive is negative)

Examples:
. Tennis Rackets and tennis balls
. Holidays and sun cream
. Egg and toast

. Complement goods have a NEGATIVE cross elasticity of demand with each other

Question 5

Name two types of goods

Answer 5

. Substitute goods
. Complementary Goods