Cross price elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good. It is the percentage change in demand for a good, in response to a percentage change in price of a related good. It is closely related to competitive pricing, which is setting the price of a product/service based on what the competition is charging. Businesses can decide the extent to which it lets competition influence its prices, based on the degree of cross price, or competitive price elasticity.

Broadly, there can be three types of relations between different products, which in turn influence the cross price elasticity between the products.

i) Substitute Goods: Here, the increase in the price of a good leads to an increase in the demand for another. Substitute goods face positive cross price elasticity. The more substitutable the two products are, the higher their cross price elasticity. ii) Complementary Goods: Here, an increase in the price of one good leads to a decrease in the demand for another. Complementary goods face negative cross price elasticity iii) Unrelated Goods: Here a change in the price of one good has no impact on the demand for another good. Cross price elasticity is zero.

Assumptions when calculating cross price elasticity:
- Impact of all other factors on the demand of the good, including its own price, is kept constant. - Both goods are ordinary goods, i.e. inverse relationship between quantity demanded and its own price. - Both goods are normal goods, i.e. positive relationship between demand and disposable income.

Degree of Elasticity:
- Demand is considered inelastic with respect to the price of a second product, if a 1% change in the price of the second product leads to a less than 1% change in the demand for the first. - Demand is considered elastic with respect to the price of a second product, if a 1% change in the price of the...

...Explain what is meant by the terms priceelasticity, income elasticity and crosselasticity of demand and discuss the main determinants of each of these. Discuss the importance of each of these to the decision making process within a typical business.
Elasticity is the responsiveness to which one variable responds to a change in another variable Priceelasticity of demand (PED) measures the responsiveness of quantity demanded of a product to a change in its price. If a relatively small change in price leads to a relatively large change in demand, the product is said to be 'elastic'.
Whereas if quantity demanded is relatively unresponsive to a change in price the product is said to be 'inelastic'.
Priceelasticity of demand can be given a numerical value which is just a number and not in terms of any particular unit. The resulting numerical figure will always be a negative number due to the inverse relationship between price and quantity demanded, but can be ignored. This numerical figure can be calculated by:Price elasticity of demand = percentage change in quantity demanded Percentage change in price For example if the price of a product rises from £20 to £24, which is a 20%change and demand falls from 400 units to 300 units, which is...

...Exam I Sample Questions
1.
The priceelasticity of demand for a good is the response of
A)
demand to a one percent change in price of that good
B)
demand to a one percent change in price of the related good
C)
quantity demanded to a one percent change in price of that good
D)
quantity demanded to a one percent change in price of that related good
E)
demand to a one percent change in income
2.
If the price of cheese falls by one percent and the quantity demanded rises by 3 percent, then the priceelasticity of demand for cheese has a value of
A)
0.03
B)
0.30
C)
0.333
D)
3
E)
30
3.
If the priceelasticity of demand for football game ticket is 2, that means if the price increases by 1% quantity demanded decreases by
A)
½%
B)
1%
C)
2%
D)
3%
E)
4%
4.
If the priceelasticity of demand for a good is greater than one, then the demand for that good, with respect to price, is
A)
elastic
B)
inelastic
C)
unitary elastic
D)
perfectly elastic
E)
perfectly inelastic
5.
Suppose a 10% increase in the price of pain relievers leads to a 5% decrease in quantity demanded of pain relievers. The elasticity for pain relievers, with respect to price, is
A)...

...founded in Will Bury’s PriceElasticity Scenario are the following:
1. Supply and Demand
One of the most fundamental concepts of economics and the backbone of a market economy is the concept of supply and demand. Demand shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time. (McConnell & Brue, 2004) The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. Therefore, there is a negative relationship between price and quantity demanded. The basic determinants of demand which affect purchases are:
• Consumers’ preferences
• The number of consumers in the market
• Consumers’ incomes
• The price of related goods
• Consumers’ expectations about future prices and incomes
Supply shows the amount of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period. (McConnell & Brue, 2004) The law of supply states that as price rises, the quantity supplied rises; as price falls, the quantity supplied falls. Therefore, there is a positive relationship between price and quantity supplied. The basic determinants of supply are:
• Resource price
• Technology...

...Economics glossary 3:
Terms:
Definitions:
Examples:
CrossElasticity of Demand (XED).
Is a measure of how much the demand for a product changes when there is a change in the price of another product.
Determinants of PriceElasticity of Demand.
is a measure used in economics to show the responsiveness, or elasticity of the quantity demanded of a good or services to a change in itsprice.
Determinants of PriceElasticity of Supply.
is a measure of how much the supply of a product changes when there is a change in the price of the products.
Elasticity.
Is the measure of responsiveness. It measures how much something changes when there is a change in one of the factor that determines it.
Elastic Demand.
The demand of a product is sensitive to price change.
Elastic Supply.
supply of a good or services that increases or decreases as the price of an item goes down or up.
Engel Curve.
It shows the relationship between income and the demand for a product over time.
Income Elasticity of Demand. (YED).
Is a measure of how much the demand for a product changes when there is a change in the consumer’s income.
Inelastic Demand.
Is the situation in which the demand for a good or service are unaffected when the price of the goods and services...

...Manipal Centre for European Studies, Manipal University, Manipal
Analysis on PriceElasticity of Demand
Abstract
The priceelasticity of demand is a factor for an industry, which is existing and the ones emerging in the market, of what is to be the price of the product; considering the demand of the same in the market and whether or not to increase the price to make any more profit sacrificing a marginal amount of sales or a shortfall in the revenue. In an effort to understand the priceelasticity of demand concept, a small study was done on the general public across the town Manipal. The study reflected the tendency of people in the town in making varying choices, which helped in the study of priceelasticity of demand of Cigarettes. The priceelasticity of demand in Cigarettes shows an elastic behaviour with select group of people and some show inelastic behaviour. Thus generalisation of such a concept would be neglecting significant number of population for studying the priceelasticity of demand of Cigarettes. Also there were situation wherein we found infinitely elastic behaviour of demand. Though these were fewer in number, it signifies that there exists a mix of various price elastic behaviour of demand. Estimating a threshold value, over which an...

...PriceElasticity of Demand
T's Jean Shop sells designer jeans. The latest trend setter has been Capri cuffed blue jeans. The demand for the Capri jeans has been very high with teenagers and young women. The business has increased its supply of Capri jeans due to the high demand. The owner, Terri Johnson, contemplates increasing the price from $9.00 to $10.00. Ms. Johnson needs to know the response of the consumers to the increasedprice. According to McConnell and Brue (2004), the PriceElasticity of Demand measures the rate of response of quantity demanded due to a price change (p. 1).
Using PriceElasticity of Demand
In calculating the PriceElasticity of Demand, we use the formula:
percentage change in quantity
demanded of product X
Ed = percentage change in price
of product X
The percentage change in quantity demanded is divided by the percentage change in price.
change in quantity demanded of X
Ed = original quantity demanded of X
change in price of X
original price of X
According to Economics.about.com, there is another way to view this equation (www.economics.about.com). The equation is:
The percentage of change...

...3
- Elasticities & Welfare
Priceelasticity of demand:
How to calculate
Sign and sizes – illustration by demand curve
E & TR
Determinants/factors
MCQs:
1. Question 4 (Quiz - topic 3):
If Sam, the Pizza Man, lowers the price of his pizzas from $6 to $5 and finds that sales increase from 400 to 600 pizzas per week, then the demand for Sam’s pizzas in this range is:
a. price inelastic.
b. price elastic.
c. unit elastic.
d. cross elastic.
e. income inelastic.
2. Question 6 (Quiz - topic 3):
If the percentage change in the quantity demanded of a good is greater than the percentage change in price, priceelasticity of demand is:
a. elastic.
b. inelastic.
c. perfectly inelastic.
d. perfectly elastic.
3. Question 15 (Quiz - topic 3):
If the priceelasticity of demand for beans is estimated to be -0.4, then a 20% increase in the price will ……….. the quantity demanded by …………….
a. Decrease, 14%
b. Increase, 16%
c. Decrease, 8%
d. Increase, 8%
4. Question 18 (Quiz - topic 3):
John spends exactly the same dollar amount of candy bars each week regardless of their price. His demand curve for candy bars is
a. Upward sloping
b. Downward sloping
c. Perfectly inelastic
d. Perfectly elastic
Illustrate by a diagram!
5. Question 2 (Quiz - topic 3):
If a...

...1a)
Priceelasticity of demand (PED) measures the degree of responsiveness of the quantity demanded of a good to a given change in price of the good itself, ceteris paribus. It is found by taking the percentage change in quantity demanded of good X divided by the percentage change in the price of good X.
The numerical value of the priceelasticity of demand is always negative due to the inverse relationship between quantity demanded and price as stated in the law of demand. When we interpret the value of the priceelasticity of demand, we just quote the absolute value. The absolute value of PED range from zero to infinity.
When PED is greater than one, the demand for the good is said to be price elastic. It means that a proportionate change in price causes a more than proportionate change in quantity demanded, ceteris paribus.
When PED is less than one, demand for the good is said to be price inelastic. This means that a proportionate change in price of the good causes a less than proportionate change in quantity demanded, ceteris paribus.
Different products have different price elastic ties due to a number of factors. Firstly the availability and closeness of substitutes. The more easily available and closer the substitutes for the good, the more...