Cross Elasticity Of Demand

Question 1

Cross Elasticity of Demand ( XED )

Answer 1

A measure of responsiveness of demand for one good to a change of price of another good

Question 2

Application of XED ( producer)

Answer 2

1. Guiding producers output decision
2. Guiding producers non price strategy (bundled deals)
   - Producers can work together with producers of close complements for bundled goods with lower price
   - Eg: airlines usually collaborate with travel insurance, hotels and transport

3) guiding producers on selection of strategies
-help to measure the effectiveness of their non pricing strategy eg: advertising
- if advertising of their products are successful, value of XED should decrease (weak substitutes/ complements)

Question 3

Application of XED ( government)

Answer 3

1. Substitutes and complements
   - Using XED, government can anticipate how much demand for public transport will increase in response to increase in fuel prices and can adjust infrastructure accordingly.
2. Taxation Policies
   - Government can predict the effects of indirect taxes
   - Predicting such shifts helps in designing more effective tax policies
3. Subsidy allocation
   - government my prediction subsidies to one industry affect demand of competing and complementary industries

Question 4

Evaluation

Answer 4

-Data that are used to calculate XED may be unreliable
- Data from the past records (price) may no longer be relevant

• The assumption of ceteris paribus that is unrealistic
• in reality , many factors such as level on income comes into play