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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


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