Cross Price Elasticity of Demand (XPED)

Question 1

What is XPED?

Answer 1

it measures the responsiveness of demand of one product, following a change in price of another

Question 2

What happens with XPED substitute goods?

Answer 2

as the price of one rises, there will be an increase in demand for the rival product - this is a positive cross price elasticity

Question 3

What happens with XPED complement goods?

Answer 3

when the price of one good decreases, the demand for the associated good increases - this is a negative cross price elasticity

Question 4

What is the equation for XPED?

Answer 4

percentage change of quantity demanded of good X/percentage change of price of good Y

Question 5

What does the positivity/negativity of equation answers mean?

Answer 5

positive answer - the 2 goods are substitutes
negative answer - the 2 goods are complements

Question 6

The higher the number of the answer…

Answer 6

the closer the 2 substitute goods are

Question 7

If the positive number is very close to 0…

Answer 7

…then they are weak substitutes

Question 8

The further away the negative number is from 0…

Answer 8

…the closer the 2 complement goods are

Question 9

If a good has a cross price elasticity of 0…

Answer 9

…then they have no relationship - they are unrelated

Question 10

What can firms estimate with XPED?

Answer 10

the impact of a rival’s pricing strategy on the demand for their own products, and, it can help firms to work out the success a complementary good’s offer