Cross price elasticity of demand (XPED)

Definition Measures the responsiveness of demand for a good or service after a change on the price of another good or service.

The XPED of a good or service is calculated as follows:- XPED formula The XPED of a good or service is calculated as follows:- Percentage change in the quantity demanded of good or service B Percentage change in the price of good or service A For substitute goods, this will give a positive(+) figure For complementary goods, this will give a negative(-) figure

Substitute & complementary goods and directed numbers Substitute goods are positively (+) correlated in respect of price and demand changes Complementary goods, are negatively(-) correlated in respect of price and demand changes Price Good A Price Good A Demand Good B Demand Good B

Substitute goods The shift in demand for good B after a rise in the price of substitute good A contraction in demand p1 p1 d2 d1 d1 Qd2 Qd1 Qd1 Qd2 Qd

Factors that determine the XPED for substitutes XPED refers to the relationship between goods and/or services, the following are examples of substitutes. Consider how close a substitute each is. private cars public transport butter cheese white bread brown bread books Kindle adidas Nike

Substitute goods XPED calculations Elasticity e.g. Degree of closeness < +1 Inelastic + 0.6 Not close substitutes +1 Unitary Some degree of substitutability > +1 Elastic +1.3 Close substitutes

Complimentary goods The shift in demand for good B after a rise in the price of complimentary good A contraction in demand p1 p1 d1 d1 d2 Qd2 Qd1 Qd2 Qd1 Qd

Factors that determine the XPED for complimentary goods/services XPED refers to the relationship between goods and/or services, the following are examples of substitutes. In the case of complimentary goods and services, one needs to also consider which is the primary product? cars fuel mobile phones service costs sun cream Holidays in the sun chips ketchup sachets shoe polish shoes

Complementary goods XPED calculations Elasticity e.g. Degree of closeness < -1 Inelastic - 0.6 Not so closely linked or it is the secondary good and a necessity -1 Unitary Some degree of closeness > -1 Elastic -1.3 Closely linked or it is the secondary good and not a necessity.

Example 1 After a -10% rise in the price of cars (average cost of a car rising from £10,000 to £11,000), the demand for public transport rises by -8% (1,000,000 journeys per day to 1,080,000) Calculate the XPED between cars and public transport. Comment on the resulting XPED

Example 2 After a -20% rise in the price of petrol (average cost of a litre of fuel rising from £1 a litre to £1.20), the demand for cars falls by +10% (10,000 cars sold a week to 9,000) Calculate the XPED between petrol and cars. Comment on the resulting XPED