Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
Upcoming SlideShare
Cross elasticity of demand
Cross elasticity of demand
Loading in …3
×
1 of 6

Cross price elasticity of demand

4

Share

Download to read offline

Related Books

Free with a 30 day trial from Scribd

See all

Related Audiobooks

Free with a 30 day trial from Scribd

See all

Cross price elasticity of demand

  1. 1. AS Economics Cross Price Elasticity of Demand Learning Objectives To understand how changes in the price of one good can affect the quantity demanded of another good To be able to calculate XED
  2. 2. Cross Price Elasticity of Demand (XED) XED measures the responsiveness of demand for good A to changes in the price of good B Formulae: XED = Percentage change in the quantity demanded of good A Percentage change in the price of good B
  3. 3. Cross Price Elasticity of Demand (XED) XED measures the responsiveness of demand for good A to changes in the price of good B XED = Percentage change in the quantity demanded of good A Percentage change in the price of good B or ∆QA Q A ÷ ∆PB PB Calculate XED for each of the following: 1. A 5% increase in the price of Coke causes a 7.5% increase in demand for Pepsi. 2. An increase in the price of bread from £1.20 to £1.60 per loaf causes a fall in demand for butter from 300 to 270 units sold.
  4. 4. Cross Price Elasticity of Demand (XED) XED measures the responsiveness of demand for good A to changes in the price of good B XED = Percentage change in the quantity demanded of good A Percentage change in the price of good B or ∆QA Q A ÷ ∆PB PB Interpreting XED results: Positive XED: Substitute goods – as price of good B rises, quantity demanded of good A rises E.g. Coke and Pepsi Negative XED: Complementary goods – as price of good B rises, quantity demanded of good A falls. E.g. bread and butter
  5. 5. Cross Price Elasticity of Demand (XED) XED measures the responsiveness of demand for good A to changes in the price of good B XED = Percentage change in the quantity demanded of good A Percentage change in the price of good B or ∆QA Q A ÷ ∆PB PB For each of the following calculate the XED and identify if the goods are substitutes or complements: 1. The price of petrol rises by 20% causing demand for cars to fall 5% 2. Demand for margarine falls 10% following a 20% cut in butter prices 3. A 20% rise in the price of toothpaste, a 15% fall in demand for cats. Fish and chips are complementary goods with a cross elasticity of demand equal to -8. Currently 50 000 fish are sold. Calculate the new demand for fish following a 2% cut in the price of chips.
  6. 6. Cross Price Elasticity of Demand (XED) XED measures the responsiveness of demand for good A to changes in the price of good B XED = Percentage change in the quantity demanded of good A Percentage change in the price of good B or ∆QA Q A ÷ ∆PB PB For each of the following calculate the XED and identify if the goods are substitutes or complements: 1. The price of petrol rises by 20% causing demand for cars to fall 5% 2. Demand for margarine falls 10% following a 20% cut in butter prices 3. A 20% rise in the price of toothpaste, a 15% fall in demand for cats. Fish and chips are complementary goods with a cross elasticity of demand equal to -8. Currently 50 000 fish are sold. Calculate the new demand for fish following a 2% cut in the price of chips.

×