IB Economics: Cross Price Elasticity of Demand (XED) – Flashcards
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*Cross price elasticity of demand (XED)*
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The responsiveness of demand for one good to a 1% change in the price of another good
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Movement along the curve for one good causing a shift in demand for another good
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OK
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*Substitutes*
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Two goods that satisfy the same need for a consumer, thus in competitive consumption XED=Positive Ex) bus and metro, black and blue pen, coffee and tea
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*Complements (complementary goods)*
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Goods that are consumed jointly XED=Negative Ex) pencil and eraser, icing and cupcakes, shampoo and conditioner, coffee and sugar
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*Closeness of a related good (substitutes and complements)*
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The stronger/closer the relationship between two goods, the further away from zero XED (absolute value). The weaker the relationship between two goods, the closer to zero XED (absolute value)
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The revenues of a firm are not only impacted by a price change of their own good, but also by a price change of a substitute or complementary good, which can be produced by the same firm or a competitor
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ok
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No relation/closeness No substitutability
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XED=0 vertical line Ex) eggs and petrol, sunglasses and chinese food, HCl and bread
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Perfect substitutes
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XED=infinite horizontal
