Cross Price Elasticity of Demand (XED) - A-Level Economics
Cross Price Elasticity of Demand
XED = % change in quantity demanded of good A / % change in price of good B
Cross-Price Elasticity of Demand (XED) is a measure of how responsive demand of good A is to a change in the price of good B.
If XED is greater than 1, the good is cross price elastic. If XED is smaller than 1, the good is cross price inelastic.
N.B. To classify negative XEDs, use the modulus of the value with the rules above (i.e. ignore the negative sign whilst you classify the YED)
For substitute goods, XED is positive because a rise in price of good B will lead to consumers switching to the substitute good A.
For complementary goods, XED is negative because a rise in price of good B will lead to a fall in the demand of both good A and B.
For unrelated goods, XED is zero.
Cross Price Elasticity of Demand (XED) measures the responsiveness of the quantity demanded of one good to a change in the price of another good. It tells us how much the demand for one good is affected by a change in the price of another good.
XED is calculated by taking the percentage change in the quantity demanded of one good and dividing it by the percentage change in the price of another good. The formula is: XED = (% change in quantity demanded of good A) / (% change in price of good B).
A positive XED means that the two goods are substitutes, meaning that a change in the price of one good affects the demand for the other good in the same direction. For example, if the price of Pepsi increases, the demand for Coca-Cola may increase as well.
A negative XED means that the two goods are complements, meaning that a change in the price of one good affects the demand for the other good in the opposite direction. For example, if the price of hot dogs increases, the demand for hot dog buns may decrease.
XED is important for businesses because it helps them understand the relationship between different products and their prices. Businesses can use XED to make pricing decisions and to determine how changes in the price of one product will affect the demand for another product.
XED affects consumer behavior by influencing the choices that consumers make when deciding which products to buy. If two products are substitutes and the price of one product increases, consumers may switch to the other product. If two products are complements and the price of one product increases, consumers may decrease their demand for both products.
Some real-world examples of XED include the relationship between Coca-Cola and Pepsi, gasoline and hybrid cars, and DVD players and DVDs.
To apply XED to analyze a market, you would need to collect data on the prices and quantities of different products in the market. You could then calculate XED for pairs of products to determine whether they are substitutes or complements. This information could be used to make pricing decisions and to develop marketing strategies.
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