Cross Price Elasticity of Demand

• What does cross-price elasticity of demand measure?

  It measures the responsiveness of the quantity demanded of one good to a change in the price of another related good.
• Why is cross-price elasticity of demand useful?

  It is useful in analyzing the relationships between substitute and complementary goods.
• What is the formula for calculating cross-price elasticity of demand between two goods A and B?

  Cross-Price Elasticity of Demand (A to B) = (% Change in Quantity Demanded of A) / (% Change in Price of B)
• What is the cross-price elasticity of demand for substitutes?

  Substitutes have a positive cross-price elasticity of demand.
• What happens to the demand for a substitute when the price of one product increases?

  An increase in the price of one product will lead to a rise in demand for its substitute.
• How does the value of the cross-price elasticity coefficient relate to substitutes?

  The higher the value of the coefficient, the closer the two products are as substitutes.
• What is the implication of a strong substitute relationship?

  Consumers are more likely to switch between competing products when there is a change in relative prices.
• What does a negative cross-price elasticity indicate about two goods?

  If cross-price elasticity is negative, then two goods are complements.
• What happens to the quantity demanded of good A when the price of good B increases if they are complements?

  An increase in the price of good B results in a decrease in the quantity demanded of good A.
• Give an example of how cross-price elasticity of demand works with complements.

  If the price of smartphones increases, demand for smartphone cases might decrease.
• What is the cross-price elasticity of demand if a 20% rise in the price of smartphones leads to a 10% reduction in demand for smartphone charging equipment?

  The cross-price elasticity of demand is (-) 0.5.
• What does a strong complementary relationship indicate?

  A strong complementary relationship indicates that the quantity demanded of one good is highly affected by the price change of another good.
• What can be inferred if the cross-elasticity of demand of good S with respect to the price of good P is +1.5?

  Goods S and P are substitutes.
• What can be inferred if the cross-elasticity of demand of good S with respect to the price of good R is -1.5?

  Goods S and R are complements.
• What can be concluded about goods P, R, and S if the cross-elasticity of demand of good P with respect to the price of good R is -1.5?

  Goods P and R are complements.
• What is the cross elasticity of demand for bus journeys with respect to car parking charges if the demand for bus journeys rose from 800 to 1000 after a 10% increase in parking charges?

  The cross elasticity of demand is +2.0.
• How can businesses use data on cross-price elasticity of demand to increase revenue and profit?

  • Product bundling: e.g., supermarket meal deals, bundled software with hardware.
  • Interdependent pricing: Analyzing XED to determine the impact of price changes on sales and revenue.
• What is an example of a product that can be considered a substitute for books?

  1. readers like Kindle and Kobo.
• What is the likely cross-price elasticity of demand for books and e-readers?

  The likely XED of books and e-readers is +0.9.
• What can be inferred from the relationship between the price of Apple iPads and the demand for Kindle Fire?

  The goods are substitutes.
• What is the measure of cross-elasticity of demand for good X in terms of good Y?

  The change in the demand for X divided by the change in the price of Y.
• What can be concluded about goods S, P, and R if the cross-elasticity of demand of good S with respect to the price of good P is +1.5?

  Goods S and P are substitutes; P and R are complements.