XED Flashcards
Cross-Price Elasticity of Demand (XED)
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)
Negative XED values
⬆ price (X) → ⬇ demand (Y)
⬇ price (X) → ⬆ demand (Y)
= Complements
Positive XED values
⬆ price (X) → ⬆ demand (Y)
⬇ price (X) → ⬇ demand (Y)
= Substitutes
Elastic XED values
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
Inelastic XED values
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
XED equal to 0
Means that they have no relationships
XED graphs
- 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