Elasticities of demand (cross elasticity of demand) pt2

Question 1

Cross Elasticity of Demand (XED)

Answer 1

How responsive the change in quantity demanded of one good is when the price of another good is changed

Question 2

what does it show and how is it measured

Answer 2

shows us if goods are unrelated, complements or substitutes

numerical value (no units)

Question 3

Formula for XED

Answer 3

XED= % change in Q.D of good A/ % Change in price of good B

Question 4

How to tell the relationship from answer

Answer 4

If answer is positive, then goods are substitutes

If answer is negative, then goods are complements

If answer is zero, then goods are unrelated

Question 5

Substitutes
(value of its XED and how it can affect its substitutes)

Answer 5

Positive XEDs (higher the value of XED closer they are substitutes)

fall in price of one sub will reduce demand for another (vice versa)

Question 6

Complements
(value of its XED and how it can affect its Complement)

Answer 6

Negative XEDs
-usually consumed together with the other good
- increase in the price of one good will lead to a reduction in demand for its complement

Question 7

Unrelated
(value of its XED and relationship)

Answer 7

XED=0
Independent of each other
Don’t affect demand of each other