 This second type of
elasticity measures the
responsiveness of
consumers of a
particular good to a
change in the price of a
related good.”
The formula:
XED = %ΔQA
%ΔPB
%ΔQA is the percentage change in
quantity of good A.
%ΔPB is the percentage change price
of good B.
The range of values is important. The sign tells us the
relationship between the goods.
• If the value of XED is positive, then goods are
substitutes for each other, e.g. Coke and Pepsi.
• The larger the value, the closer the relationship.
• If the value of XED is negative, then goods are
complements for each other, e.g. DVD players and
DVDs.
• The larger the value, the closer the relationship.
• If the value of XED is zero, then the goods are
unrelated, e.g. strawberries and mobile phones.
Page 54 in
Blue Book
XED VALUES AND THE STRENGTH OF THE
RELATIONSHIP BETWEEN PRODUCTS
The Answers:
8. XED= % change in the quantity of one good over % change in the
price of a related good. Therefore,
XED=-5/15 =- 0.33. Since the XED is negative, the good must be
complements. An example of complementary goods is charcoal and
charcoal barbeques. If the charcoal prices rise, we would expect
barbeque sales to fall.
(2 marks)
9. (1000-600)/600 = 0.67/-0.2 =-3.35
(20-25)/25
The two goods must be complementary goods, because the XED
coefficient is negative. An example is footballs and football shoes.
The two goods in this example are cross-price elastic, since the
absolute value of the XED coefficient is greater than one. (2 marks)
10. -0.8 = %ΔQ = %ΔQ/0.25
(5-4)/4
To find the % change in tennis rackets, simplify the equation:
-0.8x 0.25 = -0.2 So a 25% increase in the price of tennis balls led to
a decrease in demand for tennis rackets of 20%. (2 marks)
Camel Demand Soars in India – A Case Study
11. Camels and oil related? XED Coefficient?
• We should see a substitute relationship. Like hybrid cars replace gas
guzzling SUVs in the USA, camels in India can replace gas guzzling
tractor for farming. Because it is a substitute relationship there would
positive coefficient value.
(2 marks)
12. Cross Price elasticity for camels and oil when oil rises ($110-$130) and
quantity of camels increase from 250, 000 to 350,000.
• (+100,000/250,000) x 100= 40%
40%
= +2.22
•
( +20/$110) x 100 + 18%
18%
Oil price increases 18%, and during same time period quantity of
camels increase by 40%. There is a substitute relationship going on.
(2 marks)
13. Other factors that may affect camels as the “beast of burden”.
• Life span and health of camels – their food is not abundant.
• Lifestyle of people
• Other uses for camels that may affect it as a farm work substitute for
tractors (or other oil using equipment
• Tractors that don’t run on oil?
(2 marks)
 Income elasticity of
demand is a measure of
how much the demand
for a product changes
when there is a change
in the consumer’s
income.”
The formula:
YED = %ΔQd of the product
%Δ in income of the consumer
The sign tells us the type of good that is being
considered.
• Necessity goods are products that have low-income
elasticity, essential products, e.g. bread.
• Superior goods are products that have high-income
elasticity, non-essential products, e.g. foreign
holidays.
• Inferior goods are products that have negative
income elasticity, because the demand decreases as
income increases, e.g. cheap wine or non-brand
Page 55 in
name jeans.
Blue Book
The Range of Values for Income Elasticity
of Demand
The range of values is important.
For normal goods, the value of YED is positive, i.e. as
income increases the demand for the good increases.
• If the value is between zero and 1, then the YED is
said to be income inelastic.
•
If the value is greater than 1, then the YED is said to
be income elastic.
• NOTE: Engel Curve Figure 4.9 (potatoes fall as
income of a country rises – instead they want pasta!)
The Range of Values for Income Elasticity
of Demand
Page 5556 in Blue
Book
Page 54 Workpoint 4.5
Page 56 Workpoint 4.6
Read over pp 56-61
Page 61 – “You be the journalist”
Write and submit a typed article regarding
the Headline listed , the economic concept
and the suggested diagram.
(refer to p 17 if you need an example of how to do this!)