Cross Elasticity of Demand Flashcards
What does XED stand for?
Cross Elasticity of Demand
What does XED measure?
the proportionate response of the quantity demanded of one good to the proportionate change in the price of another
What is the definition of substitutes?
two alternative goods that could be used for the same purpose
What is the definition of complementary goods?
products which are bought and used together
What is the equation for XED?
percentage change in quantity demanded of Good X / percentage change in price of Good Y
Beats Studio headphones retail at approximately £200 per unit.
Following a change in price of the headphones (an increase in £20), there is an increase demand for a rival brand of headphones by 5%
Calculate the XED.
+0.5
What type of good has a coefficient between 0 and infinity?
Substitutes
What type of good has a coefficient less than 0?
Complements
What relationship do goods have which have an XED=0?
The goods are independent of each other
The larger the coefficient for cross price elasticity, the stronger the goods are _________ of each other.
substitutes
The smaller the coefficient for cross price elasticity, the stronger the goods are __________ of each other.
complements
When XED=0, change in demand is _______ to change in price.
Equal
A small rise in price of Costa causes large rise in demand for Starbucks.
What type of substitutes are Costa and Starbucks?
Close substitutes
A large rise in price of Tea leads to small increase in demand for Coffee.
What type of substitutes are tea and coffee?
Weak substitutes
A small fall in price of Phones causes a large rise in demand for Apps.
What type of complements are Phones and Apps?
Close complements
