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Explain The Factors Which Might Influence The Cross Price Elasticity Of Demand Between Different Products
Date : 19/01/2021
Intro:
Define cross price elasticity of demand - a measure of how much the demand for product X changes when there is a change in the price of a product Y changes..
Explain the need for firms to be aware of the possible impacts of changes in XED.
Significance of sign of XED, unlike PED - tells us the relationship between two goods.
1:Complements > negative XED.
Example DVD players and DVD.
Diagram showing an increase in price of DVD players leading to a fall in demand for DVD`s.
The value of negative XED determines whether the goods are close or remote complements.
2:Substitutes > positive XED
Example: margarine and butter.
Diagram showing an increase in price of butter leading to a rise in demand for margarine.
The value of positive XED determines whether goods are close or remote substitutes.
3:Unrelated products > XED = 0
Example: shoes and shampoo.
The increase in price of shoes would have no impact on demand for shampoo
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