economics

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• Cross Price Elasticity of Demand
• This is to the extent to which changes in the price of one good, affect the demand for another good
• Calculation
• % change in the quantity demanded of good A / % change in price of good B
• If a number is above 1 demand would be relatively price elastic- demand responds to changes in the price of other goods by a greater proportion than the change in price
• A positive answer = competing goods( or substitute goods)
• This is competitive demand
• The higher the cross price elasticity, the closer they are as substitutes
• If the answer is between 0 & 1 demand is relatively cross price inelastic- demand is relatively unresponsive
• A negative answer = complementary(consumed together)
• This is joint demand
• Close complementary goods will tend to be more cross price elastic
• The stonger the relationship between two products, the higher the coefficient of cross price elasticity of demand
• For example with two close substitutes, the elasticity will be strongly positive
• When their is a strong complementary relationship between two products , the cross price elasticity will be highly negative
• Unrelated goods have a zero cross price elasticity