CROSS-PRICE ELASTICITY OF DEMAND (XED)

IB Economics
Think back to learning the five things that will change demand for a product (i.e. create a whole
new demand curve). One of those determinants was a change in the price of a related good, both
substitutes and complements.

SUBSTITUTE REVIEW

Substitutes =

↑ price Good Y = _____ demand Good X

↓ price Good Y = _____ demand Good X

COMPLEMENT REVIEW

Complements =

↑ price Good Y = _____ demand Good X

↓ price Good Y = _____ demand Good X

If changing the price of Good Y leads to a change in demand for Good X, then we want to be able
to measure how elastic the change in demand for Good X is.

The formula to calculate the XED coefficient is a modification of the PED formula:

XED = percentage change in quantity demanded of Good X

percentage change in price of Good Y

In the case of cross-price elasticity, the value of XED may be positive or negative. With PED, we
ignored the value, but with XED the sign will tell us the relationship between the two goods.

Using the substitute/complement review above to help you, indicate below what a positive/
negative result for XED will indicate.

If XED is positive, the goods are _________________________________.

If they are closely related, they will have…

If they are less closely-related, they will have….

If XED is negative, the goods are _________________________________.

If they are closely related, they will have…

If they are less closely-related, they will have….

If XED = 0, then the goods are _____________________________.

Complete practice problems 1 through 4 on p.54 of your text.

XED PRACTICE
IB Economics

1. The price of good M increases by 15% causing a fall in the quantity demanded of good N by
5%.

a. Calculate the XED for the two goods.

b. Identify the relationship between the two goods

c. Identify an example of two goods that may demonstrate this relationship.

2. The price of good A falls from $25 to $20, leading to an increase in the quantity of good B
demanded from 600 per week to 1000 per week.

a. Calculate the XED for the two goods.

b. Identify the relationship between the two goods

c. Identify an example of two goods that may demonstrate this relationship.

3. Assume the XED for tennis balls and tennis rackets is -0.8. Calculate the change in the
quantity of tennis rackets demanded if the price of a can of tennis balls increases from $4 to
$5. What type of goods are these?

4. Suppose the price of coffee increases from $10 per kilogram(kg) to $12 per kg and the
amount of tea purchased increases from 1500 kg to 1650 kg. What is the XED? What type of
goods are these?

5. Suppose the price of pencils increases from $1.00 per pencil to $1.30 and the quantity of
erasers purchased falls from 1000 erasers to 800. What is the XED? What type of goods
are these?

6. The price of charcoal rises from $10 to $13 and the quantity of charcoal grills bought falls
from 55 to 50. What is the XED? What type of goods are these?

7. The price of chicken increases from $5 per pound to $6 per pound and the quantity of beef
sold increases from 100 tons to 125 tons. What is the XED? What type of goods are these?