Y1 13) Cross Elasticity of Demand (XED)

hi everybody cross elasticity of demand measures the responsiveness of quantity demanded of one good or service given a change in price of another so looking at XE D gives us two key pieces of information first thing we can work out is whether the goods are related to each other ie whether they are substitute Goods or whether they're complementary goods very important information there but we can also work out with the figure just how closely related they are strongly or weakly here is the equation for XE deeds that the center change in quantity demanded of good a over the percentage change in price of good B so again we've got percent of changes that's the equation for percentage change difference between two numbers over the original number times by a hundred wants to be no percentage changes we put them straight in there and we get two very important pieces of info first of all we get the sign ie whether X is positive or negative and then we get the figure if the xcd figure is positive it means that the two goods are substitute goods that makes a lot of sense using the equation is that the price of a substitute goes up quantity demanded for the other will go up as well positive positive gives a positive number as if a price of a substitute goes down quantity demanded for the other will go down negative negative gives a positive so a positive number means they are substitute goods were working with whereas if the figure is negative its complementary goods were working with them the price of a compliment goes up positive demand for the other will go down negative we get a negative number because if the price of a compliment goes down quantity demanded for the other will go up we are there with a negative number so negative is complements a nice little memory device for you here just think party sees the near Christmas party season means it's almost Christmas we're near Christmas party season near Christmas positive substitute negative complement party season near Christmas and you will get it right every time to the day I still use that is very helpful party season near Christmas positive substitute negative complement great stuff okay so that's how we work out whether the goods are substitutes or complements then the figure so once we have wiped out the name because we can ignore the sign completely just look at the rod number if that number is greater than one it means that demand between the goods is price elastic that means when the price of one good changes a quantity demanded for the other will change proportionally more than the change in price of the other they are strongly related to substitutes or complements we would say here so we can add that phrase on at the end we've got to make sure that we say demand between the goods that's the point isn't it demand between the goods here is price elastic if the figure is less than one remember ignoring the sign if the R or thicker is less than one demand between the goods is price inelastic so as the price of one good changes quantity demanded for the other will also change for proportionately less than the change in price of the first good they are weakly related Goods here weakly related complements or substitutes we would say that's the phraseology there and then 0 means that demand between the goods is perfectly priced inelastic there is no relationship at all between these Goods so 10 line the printers and shoes if the price of printers goes up it's not going to affect the quantity demanded of shoes at all is it so there'll be no relationship between those groups but for complements and substitutes first of all we'll find out if they are complements and substitutes and then we'll see just how closely related they are great way to make sure you're confident with this is with examples let's do some calculations together so let's take number 1 the price of printers goes up from 50 pounds to 60 pounds that's a 20% increase in the price of printers if you can't see that clearly use the equation the difference is 10 the originals 50 times by 120 percent increase you've got to keep the signing because we know how important the sign is in the air so leave this sign in the equation when you're doing it quantity demanded of printer ink goes down from 115 that's clearly a 50% decrease then leave the sign in again and then we can work out the final figure is minus 2 point 5 isolate the sign we know that negative means complements and these goods are complementary goods then we can ignore the sign because the figure is great in the one we can say demand between these Goods is price elastic ie they are closely related complement Goods and that means that as a price in this case the printers goes up quantity demanded of printer ink goes down but proportionally greater than the increase in price of printers let's take number 2 now so the price of a macbook pro goes up from a thousand pounds to 1500 pounds that again is very clearly an increase in price of 50% of MacBook Pros quantity demanded a Sony Vaio goes up from 200 220 so if you can see that's 10% used the equation difference is 20 divided by the original which is 200 times by a hundred keep the sign in that's a plus here of 10% do the equation and we get plus not point two as our final figure isolate the sign the sign is positive that means that these goods are substitute goods then you can ignore this sign the figure is less than 1 that means demand between these goods is price inelastic and means they are weakly related substitutes in this case what does that mean in words that means that as the price of MacBook Pros goes up quantity demanded of Sony buyers will go up but proportionately less than the increase in price of MacBook Pros that's what you've got to say simple let's go back down look at diagrams once you exceed your diagrams guys the best thing to do is to have the price of one good on the y axis and quantity of the other good on the x axis so for complements my example is this price of raises and then on the x axis the quantity of the razor blades okay for a complementary Goods will be a downward sloping demand curve given that we've got two different Goods on the axis it'll be a downward sloping demand curve because there is an inverse relationship between the price of a compliment and quantity demanded of the other compliment so downward sloping banker if they are very closely related complements you draw shallow demand curve here if your weakly related complements exit is less than 1 you would draw a steep looking demand curve here now that makes total sense so they are weakly related then take my example here as the price of raises decreases quantity demanded a razor blades will increase but proportionally less than the fallen price of razors themselves with a shallow demand curve like this as the price of raises decreases quantity demanded razor blades will increase proportionately more than the decrease in price of races so that's clearly shown with these kind of curve if we look at substitutes which will have a positive x CD positive relationship I've taken the price of a Big Mac here and quantity over what place substitute goods here two different goods on the axes but they are positively related ie price of one good and quantity demanded for the other positively related so really our demand curve is going to be upward sloping don't let that confuse you that's only because we've got two different goods on the axis okay but if you have to show X U on the diagram this is what you draw and again for a strongly related substitute shadow for weakly related substitutes steep for exactly the same reasons as before so just in case you have to show this on a diagram and draw these oh yeah maybe some multiple-choice questions or something or just your an interest these are the diagrams of the union that covers actually perfectly stay tuned for the next video we've got a ye to come next

Channel: EconplusDal

Views: 212,370

Keywords: econplusdal, econ, plus, dal, virang, econplus, economics, cross elasticity of demand, XED, cross, elasticity, demand, cross elasticity, ced, substitutes, substitute, complement

Id: 5cW7xdanyd0

Length: 7min 26sec (446 seconds)

Published: Sat Apr 14 2018