Cross Elasticity Of Demand

Question 1

What is Cross elasticity of demand?

Answer 1

A measure of responsiveness of quantity demanded of one product (B) to a change in the price of another product.

Question 2

How do you measure cross elasticity of demand?

Answer 2

XED=
percentage change in quantity demanded of product B
Percentage change in the price of product A

Question 3

What does the positive sign mean in a XED answer? E.g. +

Answer 3

Products are substitutes e.g. a rise in he price of one product will cause an increase in demand of another product.

Question 4

What does a negative sign mean in a XED answer? E.g.-

Answer 4

Products are complements. E.g. a rise in the price of one product will cause a decrease in demand for another product.

Question 5

What does it mean if XED is close to zero?

Answer 5

This implies that products are not closely related.

Question 6

How is XED helpful to firms?

Answer 6

-setting prices for their products. E.g. if the firm is selling a product with a close substitute then it will expect demand for its product to fall considerably if it decides to increase its price.

-firms also know that complementary goods can command high prices. E.g. printers-cheap ink cartridges-expensive.