XED

Question 1

Cross-Price Elasticity of Demand (XED)

Answer 1

a measure of the percentage change in quantity demanded for one good (Y) from a percentage change in the price of another good (X).

• XED simply measures how the price of one good (good X) affects the demand for another good (good Y).
• It therefore reveals the relationship between goods: substitutes (competitive demand) and complements (joint demand)

Question 2

Negative XED values

Answer 2

⬆ price (X) → ⬇ demand (Y)
⬇ price (X) → ⬆ demand (Y)
= Complements

Question 3

Positive XED values

Answer 3

⬆ price (X) → ⬆ demand (Y)
⬇ price (X) → ⬇ demand (Y)
= Substitutes

Question 4

Elastic XED values

Answer 4

XED greater than 1 (e.g. XED = 2)
XED less than -1 (e.g. XED = -2)
% Δ price (X) < % Δ demand (Y)
= X and Y are strong relationship

Question 5

Inelastic XED values

Answer 5

XED between 0 and 1 (e.g. XED = 0.5)
XED between 0 and -1 (e.g. XED = -0.5)
% Δ demand (Y) < % Δ price (X)
= X and Y are weak relationship

Question 6

XED equal to 0

Answer 6

Means that they have no relationships

Question 7

XED graphs

Answer 7

• Price of good x on the y axis
• Quantity demanded of good y on the x axis
• Substitutes - upwards sloping
• Complements - downward sloping
• inelastic - steeply sloping - XED < 1
• elastic - gentle sloping - XED > 1