4288046
Description
Flashcards by Jasmine Wells, updated more than 1 year ago
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Created by Jasmine Wells
over 8 years ago
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| Question | Answer |
| What is Cross price elasticity of demand (XED?) | Is a measure of the responsibeness of demand for one good to a change in the price of another good. |
| What is the formula for XED? | Percentage change in quantity demanded for good x/percentage change in quantity demanded for good y |
| What is the meaning of a positive XED? | Cross price elasticity of demand for 2 goods is positive (XED>0), when demand for one good and the price of another good changs in the same direction. E.g. when price of one good increases, the demand for the good increases. |
| Positive XED equals to... | Substitute goods |
| What happens when the cross price of elasticity of demand between 2 goods is positive and it is he large? | The larger the values of the cross price elasticity of demand, -the greater the substitutability between the 2 good and -larger the demand curve shift in the event of a price change. |
| What is the meaning of a negative XED? | Cross price elasticity of demand is negative (XED<0) when demand for one good and price of another changes in opposite directions. Ie. When price of one good increases, the demand for the other good decreases. |
| Negative XED equals to... | Complimentary goods |
| What happens when the XED of 2 goods is negative and absolute value is large? | The larger the absolute value of negative cross price elasticity of demand, -the greater the complimentarity between 2 goods - Larger the curve shift in the event of a price change. E.G. Two goods with XED -0.8 are stronger complimentaries than two goods with XED -0.2 |
| What occurs when the XED of 2 goods is equivalent to 0? | If XED= 0 (or close to 0), this means that the 2 products are unrelated or independent of eachother. E.g. Potatoes and pens |
| Why must a business take into careful consideration when producing substitutes? | Since the 2 goods are substitutes, a fall in a price of one product mean that there will be a fall in the demand for the other product. Low or high substitutability? |
| Why must businesses be aware of substitutes being produced by rival businesses? | To predict the effect of sales on the product and revenues if prices of rival products change. |
| Why might a firm merge with another firm producing substitute of a good? | To reduce competition. |
| Why is knowledge of XED useful for complimentary products? | Businesses producing complimentary products may want to collaborate to increase sales and revenues. E.g. airlines and hotels collaboration.A fall in price of flights are likely produce a substantial increase of holiday hotels. |
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