Explain The Factors Which Might Influence The Cross Price Elasticity Of Demand Between Different Products

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