Define the term cross price elasticity of demand and clearly explain its value for substitutes and complementary commodities

      

Define the term cross price elasticity of demand and clearly explain its value for substitutes and
complementary commodities

  

Answers


Wilfred
Cross price elasticity of demand is defined as a measure of the degree of the responsiveness of the
quantity demanded of one commodity to changes in price of another related commodity, which is
either a substitute or complementary good.
It?s given by dividing the proportionate or percentage change in quantity demanded of
one commodity by the proportionate or percentage change in price of another related commodity
such that:
formula422019400.png

Cross elasticity of demand is positive and negative for substitutes and complementary goods respectively.

It is positive for substitutes since they are used alternatively such that an increase in price of one causes an increase in the quantity demanded of the other, that is, the quantity demanded of one is an increasing function of the price of the other eg. tea and coffee.
graph1422019405.png
Fig 9.1: Substitutes

An increase in price of tea from P1 to P2 increases the quantity of coffee demanded from q1 to q2.
Cross elasticity of demand is negative for complementary goods since they are used jointly/together such that the quantity demanded of one (eg. petrol) is a decreasing function of the price of the other (eg cars)
graph2422019400.png


Wilfykil answered the question on February 4, 2019 at 12:56


Next: The demand for a commodity is twenty units when the prevailing market price equals eighty shillings per unit. However, when the price per unit rises to...
Previous: Use the data in the table below to compute income elasticity of demand through the arc elasticity method:

View More CPA Economics Questions and Answers | Return to Questions Index


Exams With Marking Schemes

Related Questions