Cross Price Elasticity This is your third type and measure of elasticity It measures the responsiveness of the quantity demanded of one good relative to.

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Presentation transcript:

Cross Price Elasticity This is your third type and measure of elasticity It measures the responsiveness of the quantity demanded of one good relative to the price of another good; eg, we will analyze how a falling price of fuel affect car sales

Cross Price Elasticity Our lovely equation… CPE= Percentage Change in Quantity Demanded of Good X Percentage Change in Price of Good Y QUANTITY OVER PRICE

Cross Price Elasticity If there is an inverse relationship between quantity demanded of one good and the price of the other, they are complements If there is a positive relationship between quantity demanded and price, they are substitutes 0 — + Complements Substitutes (at 0 there is no relevant correlation)

Cross Price Elasticity Example 1 When the cross-price elasticity of demand is negative, the goods in questions are necessarily…

Cross Price Elasticity Example 2 If the prices of pens in a market increases from $1.00 to $1.25 and the quantity of pencils demanded triples, what is the cross price elasticity?

Cross Price Elasticity Example 3 When the demand for Cheetos declines by 30%, the quantity of Flamin’ Hot Cheetos demanded goes from 100 million to 50 million. What is the CPE?