cross elasticity of demand Flashcards
What is XED
Cross-elasticity of demand (XED) is a
measure of the responsiveness of demand for one good, x to a change in price of another good, y
formula for xed
%changeinquantitydemandedofgoodx/%changeinpriceofgoody = XED
%Δqx/%Δpy = XED
what does xed stand for
Cross-elasticity of demand
what type of cross price elasticity is following coefficients
-1<+1
< -1 or > +1
Cross-price inelastic
Cross-price elastic
meaning of
Cross-price inelastic
Cross-price elastic
Demand for good X changes at a lesser proportion than the change in price of good Y.
Demand for good X changes at a greater proportion than the change in price of good Y.
3 determinants of cross elasticity of demand
whether they are
substitues
complements
or no relationship
what type of XED will Substitute have, negative, positive,
positive
Why do closer substitues have a higher xed
Close substitutes will have a higher XED as consumer demand for good X will be more sensitive to a change in price of good Y
what type of XED will complements have, negative, positive,
negative
Why do closer complements have a higher xed
Close complements will have a higher XED as consumer demand for good X will be more sensitive to a change in price of good Y
how do firms try to change their XED of their products for substitues goods
Firms will try to differentiate their products from the competition
This can be done through advertising and branding of the product so that consumers are less likely to switch to competitor’s products
If a tax is imposed on a price demand inelastic good, what will happen.
little change demand
If a subsidy is given on a price demand inelastic good, what will happen.
little change in demand but large fall in price so consumers benefit
If a tax is imposed on a price demand elastic good, what will happen.
there will be a significant decrease in demand
If a subsidy is given on a price demand elastic good, what will happen.
large increase in demand if there is a subsidy
