Cross Elasticity of Demand

Definition Measures how much the demand for the product changes when there is a change in the P of another product. % change in QD of product X % change in P of product Y

Pizza and Burgers Competitors Burger P drops from $2 to $1.80 Because of this the QD of your Pizza’s drops from 400 to 380. Burgers -20 = -10% -5 = Pizza -20 = -5% 400

What this means XED Explains the relationship between products. Result can be + or – This is important as unlike PED it matters. If it is + then the 2 goods are substitutes for each other. The higher the Value, the closer the substitute. Margarine example

XED When XED is – then the 2 goods are said to be complements. Those that have very low values are said to be close complements. Computer gaming example. Some products such as Matchsticks and houses are not related at all so an increase in P in one would have no effect on the other.

Questions In each Q explain the relationship between the products, explaining whether they are substitutes or complements to one another and why you feel that way. 2 products McDonalds and Burgerking P of Bmac falls from $3 to $2.50 QD of Whopper falls from 400 to 350 Calculate XED

Questions Xbox Console Xbox games P increase from $200 to $220 for Console QD of games decreases from 300 to 250 games Calculate XED and explain their relationship.

Income Elasticity of Demand Measures how much demand changes for a product when there is a change in the consumers income. Income rises from $60,000 to $66,000, a change of 10% Holiday spending increases from $2,500 to $3,000, a change of 20% 20 = +2 10

Results Like XED + or – is important as it tells us if it is a normal or an inferior good. Normal? Inferior? Engel Curve.

Questions on YED Income of Mr. McKeown increases from $40,000 to $44,000 (he’s only a teacher!). His spending on computers increases from $1,000 to $2,000 per annum. Calculate the YED and explain its significance in relation to Mr. McKeown.

Question Income of Mr. Snowball decreases from $100,000 to $80,000 per annum. His spending in Aeon falls from $10,000 to $8,000 per annum. Calculate YED and its significance in relation to Mr. Snowball and his shopping.