1. Cross Elasticity of Demand (XED)

2. Cross Elasticity of Demand (XED)
Cross elasticity of demand measures the responsiveness of the demand for one good in relation to a change in the price of another.
For example, if the price of Android phones (Good A)falls by10%, demand for the iPhone (Good B)may fall by 5%.
The XED of Android in relation to iPhone will be +0.5.

3. Cross Elasticity of Substitute products
Product X
Product Y
Month
Demand
(units purchased)
Price per unit
total
June
145 10
1450
147 11
1617
July
196
1960
150
1650
Q2 – Q1 Q1
_________
Py2 – Py1
Py1
1960 – 1450
1450
_________
1650 – 1617
1617
0.352
_________
0.020
+17.6

4. Close Substitute Goods
If two goods are close substitutes, there will be a high cross-elasticity of demand.
Example, if the price of Sainsbury’s flour increases 10%, demand for Robin Hood flour may increase 20%.
To consumers, there is little difference between the two goods.
Therefore, the cross elasticity of demand is +2.0

5. Weak Substitute Goods
If goods are weak substitutes, there will be a low cross elasticity of demand.
Example, if the price of The Chronicle increases 10%, the demand for the Guyana Times may only increase 1%. Therefore, the cross elasticity of demand is 0.1. These two newspapers are weak substitutes.
If the price of margarine increases 10%, demand for butter may rise 2%.

6. Perfect Substitutes
Two goods are perfect substitutes if the utility consumers get from one good is the same as another. For example a using Buckleys or Red star rubs.
The satisfaction from using Buckleys Rub is very similar to using Red Star as produced by a different company.
A4 paper from Office World gives same utility as A4 paper from WHSmiths.
Therefore, in theory, if one good was more expensive, there would be no demand as people would buy the cheaper alternative.

7. Complementary Products
Complementary Products: products that are sold separately but that are used together, each creating a demand for the other, for example, computers and computer p rograms. Or
Cars and Gasoline…
Computers
Computer Programs
Cars
Gasoline

8. Cross Elasticity of Complementary products
Product X
Product Y
Month
Demand
(units purchased)
Price
June
145
1450
147
1617
July
130
1300
140
1680
Q2 – Q1 Q1
_________
Py2 – Py1
Py1
130 – 145
145
_________
1680 – 1617
1617
_________ 63