Cross Elasticity of Demand

Question 1

What is cross elasticity of demand

Answer 1

measures the responsiveness of the demand for one good (a) to a change in the price of related good (b)

Question 2

what is the forumla for cross elasticity of demand and what does it reveal

Answer 2

the formula reveals whether product is a substitute or complement
Eab = % change in Qa Product quantity of a
————————-
% change in Pb Product price of b

Question 3

if the product is a substitute what number is produced and how this affect curve

Answer 3

produces positive cross elasticity of demand (Eab > 0)
neg/neg or pos/pos (produces positive value)
price and quantity move in the same direction

Question 4

explain an example of a substitute

Answer 4

if price rises for butter, demand for margarine will increase

Question 5

if the product is a complementary what number is produced and how this affect curve

Answer 5

produces a negative cross elasticity of demand (Eab < 0)
pos/neg or -/+
price and quantity move in different direction

Question 6

explain an example of a complement

Answer 6

if price for cars increases, demand for petrol decreases