cross elasticity of demand

• What does cross elasticity of demand (XED) measure?

  Responsiveness of demand for one product to price change of another product
• How is XED calculated?

  % change in quantity demanded of A over % change in price of B
• What is the XED value for substitutes?


  XED > 0 therefore they have a strong relationship
• Give an example of substitute goods.


  Coca Cola and Pepsi
• What is the XED value for complementary goods?

  XED < 0 and therefore have a negative XED relationship
• What happens to the demand for good A when the price of good B increases if they are complementary goods?

  Demand for good A decreases
• Provide an example of complementary goods.

  DVDs and DVD players
• What is the XED value for unrelated goods?

  XED = 0
• What does it mean if the XED value is zero?

  No impact of price change of good A and good B they are unrelated goods
• What does the size of the XED integer indicate?

  The strength of the relationship between two goods
• Why is cross elasticity of demand significant for firms?

  • Firms must understand competition
  • Awareness of complementary goods is crucial
  • Price changes by others impact their demand
  • Helps in making informed pricing decisions
• what is the value of XED for weak substitutes


  0 > XED
• what happens if complements have a weak relationship vs a strong relationship

  will always be a negative XED value

  weak complement value of XED will be a negative decimal

  strong complement value of negative integer