Cross elasticity of demand | Elasticity | Microeconomics | Khan Academy | Summary and Q&A

TL;DR

Cross elasticity of demand measures how the price change of one good affects the quantity demanded of another, and it can be positive for substitutes, negative for complements, and zero for unrelated products.

Key Insights

• 😵 Cross elasticity of demand is used to analyze how changes in price impact the demand for related goods.
• 😵 Near-perfect substitutes have a high positive cross elasticity of demand, indicating consumers' strong preference for the cheaper alternative.
• ❎ Complementary goods have a negative cross elasticity of demand, meaning that they are typically consumed together, and a decrease in the price of one leads to increased demand for the other.
• 😵 Unrelated goods have a cross elasticity of demand of zero because changes in their prices do not impact the demand for each other.
• 👋 Calculating cross elasticity of demand involves comparing the percent change in quantity demanded of one good to the percent change in price of another good.
• 😵 Cross elasticity of demand provides insights into consumer behavior, market dynamics, and pricing strategies for related products.
• 😚 The closer the substitute goods are, the higher the cross elasticity of demand, reflecting consumers' willingness to switch based on price differences.

Transcript

So far, we've been focused on the elasticity of demand for only one good. We've thought about how changes in the price of that good affect changes in its quantity. Now what we're going to explore is how we can go across goods. So we're going to talk about the cross elasticity of demand. And there's multiple different scenarios we could think about,... Read More

Questions & Answers

Q: What is cross elasticity of demand?

Cross elasticity of demand measures how a change in the price of one good affects the quantity demanded of another good. It helps identify the relationship between different products.

Q: How does cross elasticity of demand differ for substitutes and complements?

Cross elasticity of demand is positive for substitutes, indicating that a price increase for one good leads to an increase in demand for the substitute. For complements, it is negative, meaning that a price decrease for one good leads to an increase in demand for the complement.

Q: What happens to cross elasticity of demand for near-perfect substitutes?

Cross elasticity of demand for near-perfect substitutes approaches infinity. Even a small price difference between them can cause a significant shift in demand towards the cheaper option since they are nearly identical.

Q: What is the cross elasticity of demand for unrelated products?

Unrelated products have a cross elasticity of demand of zero. The price change in one product does not affect the quantity demanded of the other, as they are not related in terms of consumer preferences or usage patterns.

Summary & Key Takeaways

• Cross elasticity of demand explores how changes in the price of one good impact the demand for another good, considering scenarios such as substitutes, complements, and unrelated products.

• Near-perfect substitutes have a high cross elasticity of demand, where a small increase in price for one good leads to a significant increase in demand for the substitute.

• Complements have a negative cross elasticity of demand, where a decrease in the price of one good leads to an increase in demand for the complement.

• Unrelated products have a cross elasticity of demand of zero, as a price change in one product does not affect the quantity demanded of the other.