Cross Price Elasticity of Demand: Definition & Formula Examples for UK Economics Students

📚 Quick Study Guide

• ➕ Definition: Cross Price Elasticity of Demand (XED) measures the responsiveness of the quantity demanded of one good to a change in the price of another good.
• ➗ Formula: $XED = \frac{\% \ Change \ in \ Quantity \ Demanded \ of \ Good \ A}{\% \ Change \ in \ Price \ of \ Good \ B}$
• 🤝 Substitute Goods: Positive XED (e.g., if the price of tea increases, demand for coffee increases).
• 🧩 Complementary Goods: Negative XED (e.g., if the price of printers increases, demand for ink cartridges decreases).
• 📊 Independent Goods: XED is zero or close to zero (e.g., a change in the price of bread is unlikely to affect the demand for cars).
• 💡 Importance: Businesses use XED to make pricing decisions and understand market relationships.
• 🌍 UK Context: Understanding XED helps analyze how changes in taxes or subsidies on one product affect related markets in the UK.

Practice Quiz

1. What does Cross Price Elasticity of Demand (XED) measure?
   1. The responsiveness of quantity supplied to a change in price.
   2. The responsiveness of quantity demanded of one good to a change in the price of another good.
   3. The responsiveness of income to a change in price.
   4. The responsiveness of price to a change in quantity demanded.
2. If the XED between two goods is positive, what does this indicate?
   1. The goods are complements.
   2. The goods are substitutes.
   3. The goods are unrelated.
   4. The goods are inferior.
3. If the price of good B increases by 10% and the quantity demanded of good A increases by 5%, what is the XED?
   1. -0.5
   2. 0.5
   3. 2
   4. -2
4. Which of the following pairs of goods is most likely to have a negative XED?
   1. Tea and coffee
   2. Cars and petrol
   3. Butter and margarine
   4. Smartphones and tablets
5. If the XED between two goods is zero, what does this indicate?
   1. The goods are strong complements.
   2. The goods are strong substitutes.
   3. The goods are unrelated.
   4. The goods are inferior.
6. A company producing printers is considering increasing the price of its printers. What should they expect to happen to the demand for ink cartridges if the goods are complements?
   1. Demand for ink cartridges will increase.
   2. Demand for ink cartridges will decrease.
   3. Demand for ink cartridges will remain the same.
   4. The effect on ink cartridges cannot be determined.
7. Which of the following is the correct formula for calculating XED?
   1. $\frac{\% \ Change \ in \ Price \ of \ Good \ A}{\% \ Change \ in \ Quantity \ Demanded \ of \ Good \ B}$
   2. $\frac{\% \ Change \ in \ Quantity \ Demanded \ of \ Good \ A}{\% \ Change \ in \ Price \ of \ Good \ B}$
   3. $\frac{\% \ Change \ in \ Income}{\% \ Change \ in \ Quantity \ Demanded}$
   4. $\frac{\% \ Change \ in \ Quantity \ Supplied}{\% \ Change \ in \ Price}$