XED Flashcards

1
Q

Cross-Price Elasticity of Demand (XED)

A

a measure of the percentage change in quantity demanded for one good (Y) from a percentage change in the price of another good (X).

  • XED simply measures how the price of one good (good X) affects the demand for another good (good Y).
  • It therefore reveals the relationship between goods: substitutes (competitive demand) and complements (joint demand)
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2
Q

Negative XED values

A

⬆ price (X) → ⬇ demand (Y)
⬇ price (X) → ⬆ demand (Y)
= Complements

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3
Q

Positive XED values

A

⬆ price (X) → ⬆ demand (Y)
⬇ price (X) → ⬇ demand (Y)
= Substitutes

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4
Q

Elastic XED values

A

XED greater than 1 (e.g. XED = 2)
XED less than -1 (e.g. XED = -2)
% Δ price (X) < % Δ demand (Y)
= X and Y are strong relationship

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5
Q

Inelastic XED values

A

XED between 0 and 1 (e.g. XED = 0.5)
XED between 0 and -1 (e.g. XED = -0.5)
% Δ demand (Y) < % Δ price (X)
= X and Y are weak relationship

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6
Q

XED equal to 0

A

Means that they have no relationships

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7
Q

XED graphs

A
  • Price of good x on the y axis
  • Quantity demanded of good y on the x axis
  • Substitutes - upwards sloping
  • Complements - downward sloping
  • inelastic - steeply sloping - XED < 1
  • elastic - gentle sloping - XED > 1
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