XED

Question 1

Cross elasticity of demand

Answer 1

XED measures how much quantity demanded of good A changes in response to a change in price of good B

XED = %△Qd of A/%△ of B

Question 2

Complements (or complementary goods)

Answer 2

Complements are goods which are used and bought together (e.g. iPhones and iPhone apps)

For complements, if the price of good B (iPhone apps) increases then demand for good A (iPhones) decreases.

XED will be negative.

Question 3

Substitutes (or substitute goods)

Answer 3

Substitutes are goods which can replace one another (e.g. iPhones and Samsungs)

For substitutes, if the price of good B (Samsungs) increases then demand for good A (iPhones) increases.

XED will be positive.

Question 4

Unrelated goods

Answer 4

Unrelated goods are goods which have nothing to do with each other (e.g. cacti and hover boards)

XED = 0 for unrelated goods