Cross elasticity of demand (XeD)

Question 1

What does XeD measure?

Answer 1

The responsiveness of quantity demanded of one product to changes in the price of another product.

Question 2

How do you measure XeD

Answer 2

%change in QD of product A / %change in price of product B

Question 3

If XeD is positive, what are the two products relative to each other??

Answer 3

substitutes

Question 4

if XeD is negative, what are the two products relative to each other??

Answer 4

Complements

Question 5

If XeD is positive and high (above 1), what will be the effect on a business putting their price up??

Answer 5

They are going to lose a lot of customers to competitors because they are substitutes. The QD of A will increase with an increase in the price of B

Question 6

If XeD is positive but low (between 0 and 1), what will be the effect on a business putting their price up??

Answer 6

The movement between you and your competition is weak, you have lots of freedom to change your prices

Question 7

What level of XeD do businesses want??

Answer 7

Businesses want a low XeD (0-1) to allow them to become a monopoly.

Question 8

What 3 things does XeD depend on??

Answer 8

The industry, information and time

Question 9

How does the industry affect level of XeD??

Answer 9

Supermarkets have high XeD because there are close substitutes for their products. Football clubs have very low XeD because of club loyalties, fans aren’t going to change clubs because of price changes.

Question 10

How does information affect XeD

Answer 10

May be hard for consumers to gather information of substitutes if a shop doesn’t sell both products, so XeD may be weakened by this.

Question 11

How does time affect XeD??

Answer 11

Changes may be short term, people may change products for a few weeks before the price change wears off and they don’t care.