Download - Cross elasticity of demand
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Cross elasticity of demand
Are you
demandabl
e?
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In economics there are three types of elasticity of demand:-
Price Elasticity of Demand.
Income Elasticity of Demand.
Cross Elasticity of Demand.
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THE CROSS ELASTICITY OF DEMAND OR CROSS-PRICE ELASTICITY OF DEMAND MEASURES THE
RESPONSIVENESS OF THE DEMAND FOR A GOOD TO A CHANGE IN THE PRICE OF
ANOTHER GOOD
Cross Elasticity of Demand
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TYPES OF CROSS ELASTICITY OF DEMAND
Negative Cross Elastici
ty of deman
d.Positive Cross
Elasticity of
demand.
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NEGATIVE CROSS ELASTICITY
A negative cross
elasticity denotes two
products that are
Complements, i.e. when
the price of a
compliment product
rises, demand of other
product falls.
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POSITIVE CROSS ELASTICITY
While a Positive Cross
Elasticity denotes two
Substitute Products i.e.
if the
Price of good 1 rises the
demand of good 2 will
rise.
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SUBSTITUTE GOODS
Substitute goods are alternative i.e. those products that can be used at the place of other products. There XED will be
positive,
The weak substitutes like tea and coffee will have a low XED.
Brown bread and wheat bread are close substitutes so XED is higher
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Coffee & tea are substitute
goods
Petrol & car are complimentary
goods
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Complementary goods- These are goods which are used together, therefore XED is negative.
If the price of car increases, then there will be a fall in demand for petrol.
When setting prices firms will have to look at what alternatives the consumer has, if there are no close
substitutes they will be able to increase the price. For this reason firms spend a lot of money on advertising to
differentiate their products.
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Thank you