Cross Elasticity of Demand

Elasticity! Post 3

In microeconomics a topic I struggle with is Elasticity. So this is a series of posts to consolidate my understanding.

There are 4 types to know about for AS.

Cross Elasticity of Demand (XED)
The third type is cross elasticity of demand, which measures how the demand for one good is affected by the price change of another.

It is measured by the following formula

Cross Elasticity of Demand (XED) = %Change in Quantity Demanded of good A/ %Change in price of good B

There are 3 types of goods in this scenario:

• Substitute
• Complementary
• Unrelated

Substitute Goods are goods that could be used as alternatives to each other. If the price of good A rises and the price of goods B remains consistent, then less will be demanded of good A and more of price B and vice versa. This means the XED will be positive.

Weak substitutes such as tea and coffee will have a low XED whereas close substitutes such as different brands of the same product e.g. Tesco Butter and ASDA Butter will have a higher XED.

Complementary goods are goods which are used together therefore XED is negative so that if the price of good A rises then the demand for good B will fall.

e.g. Shoes and Shoelaces
e.g.iPhones and charging cables

Unrelated goods are those where is the price of one good changes this will not affect the demand for the other. The goods are not related and a change in one will not affect the other.

e.g. Fireworks and highlighters