Economics - 1.2.6c - Cross Elasticity of Demand (XED) Flashcards

1
Q

what is the formula for cross elasticity of demand?

A

% change in quantity demanded of good X / % change in price of good Y

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2
Q

what is the significance of XED

A

as one price of a good changes, so does the demand for other goods

businesses can measure how much of a goods demand will be affected by a change in price of another good

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3
Q

What are substitutes

A

goods where the demand increases as the price of other goods increases

eg Coca Cola and Pepsi

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4
Q

what are complements

A

goods which have no relation eg toothpaste and ketchup

these goods have no affect on eachother as the change in price of one good doesnt affect the demand of another good

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5
Q

what are the values of XED

A

positive result = substitute goods

negative result = complement goods

0 result = non-related goods

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6
Q

What are the strengths of the values

A

numbers between 0 and 1 = weakly related

numbers greater than 1 = strongly related

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7
Q

what is an example of the values

A

a value of -2.5 = strong complement goods

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8
Q

how do substitutes influence the level of XED

A

increase in the price of one good means an increase in the demand for substitute goods

Eg Scott found buses are more expensive and is now considering purchasing a car

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9
Q

how do complements influence the level of XED

A

increase in the price of one good will decrease demand for complement goods

Eg ink is now more expensive so Katie wont purchase a printer

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10
Q

how do non-complement goods influence the level of XED

A

an increase in the price of one good wont change the demand of another

Eg the price of beans goes up, but Paul still buys the same amount of dishwasher tablets

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11
Q

what is the significance of XED for firms

A

used by businesses to help them decide what products are complements and substitutes to their own goods

Eg Huawei lowered the price of their new phone meaning google and apple have to find ways to increase sales otherwise they will lose sales

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12
Q

what is the significance of XED for the government

A

used in competition policy so that governments can see whether firms are interrelated or in different markets

Eg is Lidl a competitor or Aldi or Sainburys

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