Saturday, 18 April 2015

Cross Elasticity Of Demand

XED - Cross Elasticity Of Demand

XED is the responsiveness of demand for one product following the change in price for another

XED = % change in quantity demand for good B / % change in price of good A

If 0-1 then it is inelastic. If 1+ then it is elastic.

If the number is negative (-) then the two goods are complements. Complements are two goods that go with each other, for example, If the price of a cinema ticket increases then the demand for popcorn will decrease. 

If the number is positive (+) then the goods are substitutes. This means you have one or the other. For example chicken or lamb, if the price of lamb goes up then the demand for chicken will increase. You can have weak and strong substitutes, a strong substitute would be dairy milk or galaxy therefore they will have a high XED.













Ways of lowering XED include branding and differentiating your product therefore there will be less substitutes and you can charge a higher price.

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