Cross Elasticity of Demand
Definition
• Measures how much the demand for the
product changes when there is a change in the
P of another product.
• % change in QD of product X
• % change in P of product Y
Pizza and Burgers
• Competitors Burger P drops from $2 to $1.80
• Because of this the QD of your Pizza’s drops
from 400 to 380.
• Burgers -20 = -10%
-5 = 0.5
200
-10
• Pizza -20 = -5%
400
What this means
• XED Explains the relationship between
products.
• Result can be + or –
• This is important as unlike PED it matters.
• If it is + then the 2 goods are substitutes for
each other. The higher the Value, the closer
the substitute.
• Margarine example
XED
• When XED is – then the 2 goods are said to be
complements.
• Those that have very low values are said to be
close complements.
• Computer gaming example.
• Some products such as Matchsticks and
houses are not related at all so an increase in
P in one would have no effect on the other.
Questions
• In each Q explain the relationship between the
products, explaining whether they are substitutes
or complements to one another and why you feel
that way.
• 2 products
• McDonalds and Burgerking
• P of Bmac falls from $3 to $2.50
• QD of Whopper falls from 400 to 350
• Calculate XED
Questions
•
•
•
•
Xbox Console
Xbox games
P increase from $200 to $220 for Console
QD of games decreases from 300 to 250
games
• Calculate XED and explain their relationship.
Income Elasticity of Demand
• Measures how much demand changes for a
product when there is a change in the
consumers income.
• Income rises from $60,000 to $66,000, a
change of 10%
• Holiday spending increases from $2,500 to
$3,000, a change of 20%
• 20 = +2
• 10
Results
• Like XED + or – is important as it tells us if it is
a normal or an inferior good.
• Normal?
• Inferior?
• Engel Curve.
Questions on YED
• Income of Mr. McKeown increases from
$40,000 to $44,000 (he’s only a teacher!).
• His spending on computers increases from
$1,000 to $2,000 per annum.
• Calculate the YED and explain its significance
in relation to Mr. McKeown .
Question
• Income of Mr. Snowball decreases from
$100,000 to $80,000 per annum.
• His spending in Aeon falls from $10,000 to
$8,000 per annum.
• Calculate YED and its significance in relation to
Mr. Snowball and his shopping.