1. AS Unit F581:
Markets in action
Competitive markets and
how they work:
Cross price elasticity of
demand (XED)

2. Definition and formula
Definition
The responsiveness of quantity
demanded of one good to a change in
the price of another
Formula
percentage change in quantity demanded of Good A
percentage change in price of Good B

3. Task 1
Work in pairs
6)
Decide what impact change in the price of
Good B might have on the quantity demand of
Good A
Good A
Good B
Effect
Flights
Price of holidays
abroad
Higher price of holidays reduces
demand for flights
Nexus 7
Price of iPads
Lower price of iPads reduces
demand for Nexus 7
Bus travel
Price of petrol
Higher price of petrol might increase
demand for bus travel
Car travel
Price of insurance
Lower price of car insurance raises
demand for car travel
Private
education
Price of gas
Unlikely to be any relationship

4. Terminology (1)
Substitute goods
Where higher price of Good B leads to
higher quantity demanded of Good A
XED is positive (+)
Complement goods
Where higher price of Good B leads to
lower quantity demanded of Good A
XED is negative (-)

5. Terminology (2)
Close substitutes
Where a change in Price of Good B leads to a
more than proportionate change in Qd of Good
A (XED > 1)
Close complements
Where a change in Price of Good B leads to a
more than proportionate change in Qd of Good
A (XED < -1)

6. Usefulness of XED
YED is useful for a business as it allows them to:
 forecast changes in demand for their product
based on forecast changes in price of other
goods
This allows them to:
 determine which goods are the closest
substitutes
 Take action to reduce the degree of
substitutability by building brand loyalty

7. Task 3
In pairs, prepare a
short presentation
on XED using a
blog entry on
Tutor2u
Present your
findings to the
rest of the group
using KeyNote

8. Task 4
In your table groups, talk
through the past paper questions
on XED
How will you show analysis (AO3)
and evaluation (AO4)?
Individually, write up answers
for assessment