Economics
CUC –Form IV
Updated September 2017
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and you make them but
clever devils.
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&
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Kerwin
Alexander
•
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Contact/Whatsapp:
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you
plan
to
pursue:
Well?
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M. Chuma
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to receive knowledge.
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to help and serve others.
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YED
The following information relates to the number of Cafeteria
Meals demanded among the CUC Students
• When income is $450 meals demanded is 4
• When income is $550 meals demanded is 7
a. Calculate the YED when income changes from $450 to $550 (3 marks)
b. Describe the degree of YED found (1a.) above and what type of good it
indicates Cafeteria meals may be (4 marks)
YED
CUCLAND has a brand new store
selling cheap shoes. Let's again
assume the economy is doing well
and everyone's income rises by
30%. Because people have extra
money and can afford nicer shoes,
the quantity of cheap shoes
demanded decreases by 10%.
I. Find the YED? (3 marks)
II. Interpret the YED found in (i.) (7
marks)
Elasticity
Responsiveness to Change
1. What do we call responsiveness to change
in economics and what does it tell us?
2. By How much would buyers and sellers
change their plans in response to
changes in some factor(s) e.g. price of
the good; income or price another good?
Key Definitions
❑Elasticity refers the degree to which individuals, consumers or
producers change their demand or the amount supplied in
response to changes in price or income or some other relevant
factor
or
❑Elasticity is a measure of the responsiveness of one economic
variable to another.
Or
❑Elasticity is a measure of how much buyers and sellers respond
to changes in market conditions.
Elasticity
Cross Elasticity of Demand
See You Guys Next Time!
1. Come prepared for TEST
next class on
PED/YED/XED/PES
May The Lord Bless and Keep You Until…
Set Induction
• Define and Explain ‘Cross elasticity of demand’
• Calculate Cross elasticity of demand
• Identify key factors that affect the Cross elasticity of
demand
• Explain what is a substitute good and what is a
complementary good
of Responsiveness)
Define the Term Elasticity (Measure
Elasticity Concept Map
Types of
Elasticity
Measures the
Responsiveness of
Price
Elasticity of
Demand
Quantity demanded to a
in P
Income
elasticity of
demand
Cross
elasticity of
demand
Price elasticity
of Supply
Quantity demanded to a in
I
Quantity demanded to a
in P of another good
Quantity supplied to a in
P
Recall and Recap Briefly
Think!
Today we are going to examine the change in
demand for a particular good not because of a
change income or not even because of a change in
the price of that good but because of a change in
the price of ANOTHER GOOD – CROSS ELASTICITY
OF DEMAND
CROSS ELASTICITY OF DEMAND (XED)
Walking into the SAM’S MINI MART Jabari observed:
The Following Was Observed At SAM”S MINI
MART
:
1
2
3
4
Complementary Goods (Negative XED)
Examples:
❑Cars and Petrol.
❑Shoes and Polish.
❑Samosa and Potato.
❑Computer Hardware and Computer Software.
❑Printer and Ink Cartridges.
❑Torch and Battery.
❑Pencils and Erasers.
❑Gaming Portals and DVD of Games.
❑Mobile Phones and Sim Cards.
❑Iron Ore and Cooking Coal.
Substitute Goods (Positive XED)
Examples:
❑Tea and coffee
❑Bus, taxi and car
❑Pizza Boys and Pizza Hut
❑Butter and margarine
❑Beer and Wine
❑McDonald's and Burger King.
❑Starbucks vs Dunkin'Donuts
❑KFC and Royal Castle
❑Bing Search and Google Search
❑Electric cars and gas cars
❑Private schools and public schools
❑Coca Cola and Pepsi.
Substitute Goods (Positive XED)
Recall and Recap Briefly – What Type of
Good? –
Price of Coffee
Demand
D
D
Quantity of Tea
Demand Curve for Substitutes
Demand Curve for Complements
Interpreting XED
:
Now You Try!. Cross Elasticity of Demand
E.G. 1
Price for Guava Jam
Y
Original
New/Change
Quantity Demanded/QD
Butter/Week (33.3%) “X”
$6
$12
6
8
❑Cross Elasticity of Demand (XED) =
Percentage Change in QD of good X/ Percentage Change Price of Good Y
%∆𝑸𝑫𝒙
%∆𝑷y
or
∆𝑸𝒙
𝑸𝒙
÷
∆𝑷𝒚
𝑷𝒚
Cross Elasticity of Demand
E.G. 1
Original
New/Change
Price for Guava Jam
Quantity Demanded/QD Butter/Week
(33.3%)
$6
$12
6
8
❑Cross Elasticity of Demand (XED) = %∆𝑸𝑫𝒙
%∆𝑷y
∆𝑸𝒙
Or
𝑸𝒙
%∆𝑸𝑫𝒙
%∆𝑷y
𝑵𝒆𝒘 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙−𝑶𝒍𝒅 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙 𝟏𝟎𝟎
x
=
𝑶𝒍𝒅 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙
𝟏
𝟖−𝟔 𝟏𝟎𝟎
=
x
𝟔
𝟏
𝟐 𝟏𝟎𝟎
NOTE: “+33.3” indicates that quantity
=
x
= 33.3 %
𝟔
𝟏
demand has increased
∴ %∆𝑸𝑫𝒙 = 33.3%
÷
∆𝑷𝒚
𝑷𝒚
Cross Elasticity of Demand
E.G. 1
Original
New/Change
Price for Guava Jam
$6
$12
QD Butter/Week (33.3%)
6
8
❑Cross Elasticity of Demand (XED) = %∆𝑸𝑫𝒙
%∆𝑷y
%∆𝑸𝑫𝒙
%∆𝑷y
𝑵𝒆𝒘 𝑷𝒓𝒊𝒄𝒆 𝒚−𝑶𝒍𝒅 𝑷𝒓𝒊𝒄𝒆 𝒚
𝑶𝒍𝒅 𝑷𝒓𝒊𝒄𝒆 𝒚
x
𝟏𝟎𝟎
=
𝟏
=
NOTE: “+100” indicates that Price has
increased
=
𝟏𝟎𝟎
x
𝟏
𝟔 𝟏𝟎𝟎
x
= 100%
𝟔
𝟏
𝟏𝟐−𝟔
𝟔
∴ %∆𝑷𝒚 = 100%
∆𝑸𝒙
Or
𝑸𝒙
÷
∆𝑷𝒚
𝑷𝒚
Cross Elasticity of Demand
E.G. 1
Original
New/Change
Price for Guava Jam
$6
$12
QD Butter/Week (33.3%)
6
8
❑Cross Elasticity of Demand (XED) = %∆𝑸𝑫𝒙
%∆𝑷y
%∆𝑸𝑫𝒙
𝟑𝟑. 𝟑𝟑%
=
%∆𝑷y
𝟏𝟎𝟎%
= 𝟎. 𝟑𝟑
∆𝑸𝒙
Or
𝑸𝒙
÷
∆𝑷𝒚
𝑷𝒚
Interpretation: A positive XED indicates that
the goods are substitutes for each other where
as the price of one of the goods increases the
demand for the other would also increase.
There is a positive or direct relationship (both
price of y and QD of x moves in the same
direction/increases) between the price for good
y and the QD for good x when the goods are
substitutes for each other
:
What If The Price Of The Good Decreases?
Cross Elasticity of Demand
E.G. 1
Original
New/Change
Price for Bread
Quantity Demanded/QD
Butter/Week (-10%)
10
9
$5
$6
Percentage Change in QD of good X/ Percentage Change Price of Good Y
%∆𝑸𝑫𝒙
%∆𝑷y
or
∆𝑸𝒙
𝑸𝒙
÷
∆𝑷𝒚
𝑷𝒚
Cross Elasticity of Demand
E.G. 1
Original
New/Change
Price for Bread
QD Butter/Week (33.3%)
$5
$6
10
9
%∆𝑸𝑫𝒙
%∆𝑷y
∆𝑸𝒙
Or
𝑸𝒙
%∆𝑸𝑫𝒙
%∆𝑷y
𝑵𝒆𝒘 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙−𝑶𝒍𝒅 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙 𝟏𝟎𝟎
x
=
𝑶𝒍𝒅 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙
𝟏
𝟗−𝟏𝟎 𝟏𝟎𝟎
NOTE: “-10” indicates that quantity
=
x
𝟏𝟎
𝟏
demand has decreased – thus we can
−𝟏 𝟏𝟎𝟎
already see that XED for
=
x
= -10 %
𝟏𝟎
𝟏
complementary goods are
negative/causes demand to decrease
∴ %∆𝑸𝑫𝒙 = -10%
÷
∆𝑷𝒚
𝑷𝒚
Cross Elasticity of Demand
E.G. 1
Price for Bread
Original
New/Change
QD Butter/Week (33.3%)
$5
$6
10
9
%∆𝑸𝑫𝒙
%∆𝑷y
%∆𝑸𝑫𝒙
%∆𝑷y
𝑵𝒆𝒘 𝑷𝒓𝒊𝒄𝒆 𝒚−𝑶𝒍𝒅 𝑷𝒓𝒊𝒄𝒆 𝒚
𝑶𝒍𝒅 𝑷𝒓𝒊𝒄𝒆 𝒚
x
𝟏𝟎𝟎
=
𝟏
=
NOTE: “+20” indicates that Price has
increased
=
𝟔−𝟓 𝟏𝟎𝟎
x
𝟓
𝟏
𝟏 𝟏𝟎𝟎
x
= 20%
𝟓
𝟏
∴ %∆𝑷𝒚 = 20%
∆𝑸𝒙
Or
𝑸𝒙
÷
∆𝑷𝒚
𝑷𝒚
Cross Elasticity of Demand
E.G. 1
Price for Bread
Original
New/Change
%∆𝑸𝑫𝒙
%∆𝑷y
−𝟏𝟎
=
𝟐𝟎%
= −𝟎. 𝟓
QD Butter/Week (33.3%)
$5
$6
10
9
%∆𝑸𝑫𝒙
%∆𝑷y
∆𝑸𝒙
Or
𝑸𝒙
÷
∆𝑷𝒚
𝑷𝒚
Interpretation: A negative XED indicates that the
goods are complements for each other where as
the price of one of the goods increases the
demand for the other would decrease. There is a
negative or indirect or inverse relationship (Price
and QD moves in different directions: price increase
but QD decreases) between the price for good y
and the QD for good x when the goods are
complementary
Cross Elasticity of Demand
%∆𝑸𝑫𝒙
%∆𝑷y
Cross Elasticity of Demand
E.G. 1
Price for Apple
Original
New/Change
QD Pear
$2
$2.50
30
50
%∆𝑸𝑫𝒙
%∆𝑷y
%∆𝑸𝑫𝒙
%∆𝑷y
∆𝑸𝒙
Or
𝑸𝒙
𝑵𝒆𝒘 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙−𝑶𝒍𝒅 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙 𝟏𝟎𝟎
x
=
𝑶𝒍𝒅 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙
𝟏
𝟓𝟎−𝟑𝟎 𝟏𝟎𝟎
=
x
𝟑𝟎
𝟏
𝟐𝟎 𝟏𝟎𝟎
=
x
= 67%
𝟑𝟎
𝟏
∴ %∆𝑸𝑫𝒙 = 67%
÷
∆𝑷𝒚
𝑷𝒚
Cross Elasticity of Demand
E.G. 1
Price for Apple
Original
New/Change
QD Pear
$2
$2.50
30
50
%∆𝑸𝑫𝒙
%∆𝑷y
%∆𝑸𝑫𝒙
%∆𝑷y
𝑵𝒆𝒘 𝑷𝒓𝒊𝒄𝒆 𝒚−𝑶𝒍𝒅 𝑷𝒓𝒊𝒄𝒆 𝒚
𝑶𝒍𝒅 𝑷𝒓𝒊𝒄𝒆 𝒚
x
𝟏𝟎𝟎
=
𝟏
=
NOTE: “+27” indicates that Price has
increased
=
𝟐.𝟓−𝟐 𝟏𝟎𝟎
x
𝟐
𝟏
.𝟓 𝟏𝟎𝟎
x
= 25%
𝟐
𝟏
∴ %∆𝑷𝒚 = 25%
∆𝑸𝒙
Or
𝑸𝒙
÷
∆𝑷𝒚
𝑷𝒚
Cross Elasticity of Demand
E.G. 1
Price for Apple
Original
$2
$2.50
New/Change
%∆𝑸𝑫𝒙
%∆𝑷y
QD Pear
𝟔𝟕%
=
𝟐𝟓%
= 𝟐. 𝟕
30
50
%∆𝑸𝑫𝒙
%∆𝑷y
∆𝑸𝒙
Or
𝑸𝒙
÷
∆𝑷𝒚
𝑷𝒚
Why XED Matters
The Cross elasticity of demand :
❑Companies utilize cross-elasticity of demand to establish prices to sell
their goods. Products with no substitutes have the ability to be sold at
higher prices because there is no cross-elasticity of demand to
consider. However, incremental price changes to goods with
substitutes are analyzed to determine the appropriate level of demand
desired and the associated price of the good. Additionally,
complementary goods are strategically priced based on cross-elasticity
of demand. For example, printers may be sold at a loss with the
understanding that the demand for future complementary goods,
such as printer ink, should increase.
Why XED Matters
The Cross elasticity of demand tells you:
❑How your customers will react to a change in your product’s price.
❑It is a way to mathematically measure the amount you can increase an item’s
price by before your sales revenue begins to fall.
❑Some products have a high XED. This means that your sales will decrease
when you raise the selling price. Why?
❑Other products have a low cross elasticity of demand. This means that your
sales are largely unaffected when you increase the product’s price. Why?
❑The cross elasticity of demand can help you find the optimal selling price for
your products.
Why XED Matters
The Cross elasticity of demand also helps in the:
❑Classification of goods: Goods are classified into substitute and complementary. If
cross elasticity of demand between any two goods is positive, the goods may be
considered as substitute for each other. If the cross elasticity is greater, the good are
closer substitute. If it is infinite, they are perfect substitute. If the cross elasticity of
demand for any two related goods is negative, the two goods may be considered as
complementary for each other. If the negative cross elasticity of demand is high, the
degree of complementarily is also high.
❑Classification of Market: Market structure has been classified by prof. Bayn on the
basis of cross elasticity of demand. If the cross elasticity of demand is infinite, the
market is perfectly competitive. If the cross elasticity is zero or almost zero, the market
structure is monopoly. If the cross elasticity is high there is imperfect market.
Why XED Matters
The Cross elasticity of demand also helps in the:
❑Pricing Policy; Large firms produce different related goods. For example Nepal Liver
Limited produces various brands of tooth paste & tooth brush. They are
complementary goods. Similarly, Nepal Dairy Limited produces ice-cream of different
flavor. Cross elasticity of demand helps firms to decide whether to increase price of
related products or not.
❑Determination of boundaries between industries; Concept of cross elasticity of
demand is useful in order to decide to which product should include in which
industry. If related goods having negative cross elasticity (complementary goods), they
belong to different industries. If the related goods having positive cross elasticity
(substitute goods), they belong to one industry.
Why XED Matters
❑If the goods are substitutes or complements, the numerical value of the XED will be
much larger than if the two goods bear little relation to each other; i.e. a change in the
price of one good will have a significant impact on the demand for the other good.
This will be important for business decision making.
❑For example, consider two manufacturers of different brands of beer (perhaps your
teachers will take you on a field trip to test this?) Brand X and Brand Y, which are close
substitutes for each other. The decision by the manufacturer of Brand X to lower price
will, other things being equal, lead to an increase in the consumption of Brand X beer.
If the manufacturer of Brand Y beer leaves the price unchanged, he is likely to
experience a decrease in demand as Brand X will become relatively, and possibly
absolutely, more expensive than Brand Y. The manufacturer of Brand X is faced with
an important pricing decision in order to compete effectively with the rival.
Why XED Matters
❑Conversely, consider the case of two goods which are complements,
strawberries and cream. A good harvest will increase the supply of strawberries
and lower their price. There will be a movement along the demand curve for
strawberries, an extension of demand. Given that people like to pour cream on
their strawberries to give extra taste, manufacturers of cream will have to make
important output decisions if they are to meet the potential increase in
demand for cream arising from higher consumption of strawberries
:
Recall and Recap Briefly
Price of Coffee
Demand
D
D
Quantity of Tea
Demand Curve for Substitutes
Demand Curve for Complements
Demand Schedule
NOTE
All determinants except price causes shifts in the
demand curve. Its important not to confuse the
terms “change in quantity demanded” which
causes an extension or contraction in the demand
curve/movement along the curve, versus a change
in demand shown by a shift in the demand curve.
Cross (X) Elasticity of Demand
Cross elasticity of demand or XED measures how
demand for one good (good A) changes in response to
the price of another good or (good B)
It looks at the proportionate change in demand for good A
in response to changing price of another good (good)
ceteris paribus. Some goods sell relatively better or worse
than others when the price of another good changes, while
some goods are not affected by the change in price of
another good
Cross (X) Elasticity of Demand
Cross elasticity of demand or XED measures how
demand for one good (good A) changes in response to
the price of another good or (good B)
Can You GIVE ANY EXAMPLES of goods that change in
response to the change in price of another good in real
life?