Theme 1.2 - Cross Price Elasticity Of Demand

Question 1

What is the XED formula?

Answer 1

% Change in QD of product X / % Change in Price of Y

Question 2

What does XED measure?

Answer 2

How responsive quantity demanded of one good is to changes in the price of a different good

Question 3

What are the 3 types of good? (In XED context)

Answer 3

Substitutes
Complements
Unrelated

Question 4

What are the elasticity thresholds for these 3 goods?

Answer 4

Sub - Positive
Comp - Negative
Un - 0

Question 5

What does sign infer about a good?

Answer 5

Whether it is a substitute or a compliment

Question 6

What does size infer about a good?

Answer 6

Degree of cross price elasticity
Higher value = Higher elasticity

Question 7

Describe the changes caused by close and weak substitutes

Answer 7

Close - Small rise in Price x causes large rise in QD y
Weak - Large rise in Price x causes small rise in QD y

Question 8

Describe the changes caused by close and weak complements

Answer 8

Close - Small fall in Price x causes large rise in QD y
Weak - Large fall in Price x causes small rise in QD y

Question 9

What are the uses of XED?

Answer 9

Helps to classify goods
Helps to determine pricing policy
Subs - Firm can determine affect of competitor cutting prices
Subs - Brand loyalty reduces price sensitivity + XED
Comps - Firms can predict affect of change in Px on QDy

Question 10

What are the limitations of XED?

Answer 10

Values based off estimates
Difficult to forecast changes in demand
Information may become outdated
Elasticity changes over time
Other factors can cause shift in curve