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Cross Elasticity of Demand

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by

Miss Cummins

on 20 December 2016

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Transcript of Cross Elasticity of Demand

Formula
ΔQA PB1 + PB2
ΔPB QA1 + QA2
CED
Cross Elasticity of Demand

This measures the proportionate/percentage change in the quantity demanded for one good caused by the proportionate/percentage change in the price of another good
Complementary Goods
Goods that are used in conjunction with one another

Examples:
Substitute Goods

Complementary Goods
Substitute Goods
Goods that satisfy the same needs - act as alternatives

Barrys and Lyons Tea !
Barrys increases in price - QD for Lyons will most likely increase (cheaper alternative)


* How the quantity demanded is affected by the change in price of another good
×
PB1 = original price
PB2 = new price
ΔPB = change in price
QA1 = original quantity
QA2 = new quantity
ΔQA = change in quantity
The bigger the value from the formula - the closer the substitute
A positive result from the CED formula indicates a substitute good - positive relationship between Barrys/Lyons tea
A change in the price of petrol will have an effect on the QD of high performance cars
The bigger the value = the more complementary the good
A negative answer from the cross elasticity formula indicates that the goods are complementary
If the price of petrol increases, the QD of high performance cars will decrease in the long run as consumers will reduce their spending on petrol and reduce spending on high performance cars
Cars & petrol, Golf clubs & golf balls, Cameras & memory cards
Full transcript