Friday 1 March 2013

So for this week I've learnt about cross elasticity of demand (XeD). It happens when the quantity of good X is affected by the change in price of a related good. There will only be two factors which affects the value of XeD, which is substitute goods and complementary goods. 

SUBSTITUTE GOODS 
  1. sign: Positive 
  2. If there is an increase in price for Iphone, the quantity demanded of a related good which is samsung will be reduced. If the value of XeD is elastic, this shows that the market is competitive and a raise in price affects the demand a lot. 
  3. Ways to prevent it is to improve quality, advertising strategies and many more.
COMPLEMENTARY GOODS

  1. sign: Negative
  2. If there is an increase in price for petrol, the quantity demanded on cars will be lowered. If the XeD is inelastic, it shows that some people are willing to pay for the raise petrol price. 
  3. Sometimes a good may not have complementary goods due to its position. It may be a superior good, nothing can affect the demand of it. Therefore,the sign will be "0" ( no effect).

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