cross-elasticity of demand (xed)1.2.3

Question 1

Define XED?

Answer 1

This measures the responsiveness of quantity demanded of a good/service given a change in the price of another.

Question 2

How do you calculate XED?

Answer 2

XED= percentage change in quantity demand of good a/ percentage change in the quantity of good b

Question 3

How do you know XED is positive?

Answer 3

When XED is positive the two goods are substitutes goods, so as the qd of good A increases the quantity of good B will decrease-vice-versa.

Question 4

How do you know XED is negative?

Answer 4

When XED is negative, the two goods are complementary goods so as the qd of good A increases then the price of good B will increase-same.

Question 5

How can you remember this term?

Answer 5

Party-positive
Season-substitutes
Near-negative
Christmas-complementary goods

Question 6

When it is less than 1, what does this mean for XED?

Answer 6

When it is less than 1, demand between the goods will be price-inelastic.

Question 7

When it’s greater than one, what happens to XED?

Answer 7

The demand between goods is price elastic.

Question 8

When it is 0, what happens to XED?

Answer 8

The demand between goods will be perfectly priced inelastic e.g shoes and printers

Question 9

E.G the product of a good is -2.5, how is this a complementary good?

Answer 9

This will be a complementary good because it is >1 we know that the good is price elastic so they are closely related.

Question 10

E.G the product is 0.2, how is this a substitute?

Answer 10

This means that demand will be price-inelastic and they are weakly related.