cross elasticity of demand

• Cross price elasticity measures the responsiveness of quantity demanded to changes in the price of another good.
• CPE = % change in quantity demanded of good A/ % change in Price of good b
• IF XED is positive, the goods are substitutes

  If XED is negative, the goods are complements
• IF XED if > 1 , the DEMAND BETWEEN the goods is price elastic ( strongly related
• If XED < 1, the DEMAND BETWEEN the goods is price inelastic ( weakly related)
• if xed is 0, demand between the goods is perfectly price inelastic ( no relationship)
• says if good are substitutes or complements and how strong the relation is between them
• firms can use XED numbers to set prices for complements e.g. they can decrease the price of one good and increase the price of the complement by a lot but ppl will still buy ite.g. reduce price of printers but increase price of printer ink

  For substitutes, firms may consider reducing price to make it lower than competition
• non-price competitions:

  • instead of changing, price you could change other factors
  • could stop a price lowering spiral
  • could also reduce the strong relationship between the goods