Cross price elasticity of demand
- 1. AS Unit F581: Markets in action Competitive markets and how they work: Cross price elasticity of demand (XED)
- 2. Definition and formula Definition The responsiveness of quantity demanded of one good to a change in the price of another Formula percentage change in quantity demanded of Good A percentage change in price of Good B
- 3. Task 1 Work in pairs 6) Decide what impact change in the price of Good B might have on the quantity demand of Good A Good A Good B Effect Flights Price of holidays abroad Higher price of holidays reduces demand for flights Nexus 7 Price of iPads Lower price of iPads reduces demand for Nexus 7 Bus travel Price of petrol Higher price of petrol might increase demand for bus travel Car travel Price of insurance Lower price of car insurance raises demand for car travel Private education Price of gas Unlikely to be any relationship
- 4. Terminology (1) Substitute goods Where higher price of Good B leads to higher quantity demanded of Good A XED is positive (+) Complement goods Where higher price of Good B leads to lower quantity demanded of Good A XED is negative (-)
- 5. Terminology (2) Close substitutes Where a change in Price of Good B leads to a more than proportionate change in Qd of Good A (XED > 1) Close complements Where a change in Price of Good B leads to a more than proportionate change in Qd of Good A (XED < -1)
- 6. Usefulness of XED YED is useful for a business as it allows them to: forecast changes in demand for their product based on forecast changes in price of other goods This allows them to: determine which goods are the closest substitutes Take action to reduce the degree of substitutability by building brand loyalty
- 7. Task 3 In pairs, prepare a short presentation on XED using a blog entry on Tutor2u Present your findings to the rest of the group using KeyNote
- 8. Task 4 In your table groups, talk through the past paper questions on XED How will you show analysis (AO3) and evaluation (AO4)? Individually, write up answers for assessment