Unit 1: XED

• What does XED stand for in economics?

  Cross Elasticity of Demand
• What does XED measure?

  XED measures the responsiveness of quantity demanded of one good to a change in the price of another good
• What is the formula for calculating XED?


  XED = \frac{\Delta Q_d}{\Delta P} \cdot \frac{P}{Q_d}
• What types of goods does XED explain?

  • Substitute goods: Positive relationship
  • Complementary goods: Negative relationship
• What does a positive XED indicate about two goods?

  A positive XED indicates that the goods are substitutes
• What does a negative XED indicate about two goods?

  A negative XED indicates that the goods are complements
• What does it mean if the XED is greater than 1?

  It means the demand between the goods is strongly related
• What does it mean if the XED is less than 1?

  It means the demand between the goods is weakly related
• What happens to the quantity demanded of good B when the price of good A increases, if they are substitutes?

  The quantity demanded of good B will increase
• What happens to the quantity demanded of good B when the price of good A increases, if they are complements?

  The quantity demanded of good B will decrease
• What are the characteristics of substitute goods in terms of XED?

  • Positive relationship
  • Demand increases for one good when the price of the other increases
  • Graphically represented by an upward sloping curve
• What are the characteristics of complementary goods in terms of XED?

  • Negative relationship
  • Demand decreases for one good when the price of the other increases
  • Graphically represented by a downward sloping curve
• What is the relationship between the price of good A and the quantity demanded of good B for substitute goods?

  As the price of good A increases, the quantity demanded of good B increases
• What is the relationship between the price of good A and the quantity demanded of good B for complementary goods?

  As the price of good A increases, the quantity demanded of good B decreases