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--2.2.1 DEFINITION--
--2.2.1 DEFINITION--
"How RESPONSIVE is the QUANTITY DEMANDED of your good to changes in its OWN PRICE, CONSUMERS' INCOME, or THE PRICES OF RELATED GOODS?"
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Elasticity measures how responsive the quantity demanded of a good is to changes in one of its determinants, such as its own price (PED), consumers' income (YED), or the price of a related good (XED).
--CROSS ELASTICITY OF DEMAND (XED)--
"XED is a measure of the RESPONSIVENESS of QUANTITY DEMANDED of your good with respect to changes in THE PRICES OF RELATED GOODS.
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"XED is measured using the following formula."
% change in Qd of Good A / % change in the price of the other Good B, and therefore shows the percentage change in the demand for Good A for every 1% change in the price of Good B"
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"So what does the sign (positive or negative) as well as the value of this measurement tell us about the relationship between the two goods measured?"
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"Imagine you own a CINEMA and NETFLIX raised its prices by 20%. What do you think would happen to the quantity demanded of your cinema tickets with respect to this change in subscription fees?"
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"I would expect the demand for tickets with respect to the rise in the price of Netflix to increase as these two goods are SUBSTITUTES; when the price of Netflix rises, some customers will cancel their subscriptions, watch public TV instead, and go visit the cinema more often, and thus increasing demand, ceteris paribus."
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"So if both % changes are increases (greater than zero), then the XED value must be POSITIVE; hence, in the case of SUBSTITUTES, the XED is always a POSITIVE value."
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--TASK--
"In the above example, the substitute good (Netflix) raised its price, but what would happen if it lowered its price? Would the XED still be positive?" "Explain your answer."
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"Now imagine you own a MICROWAVE POPCORN COMPANY, and NETFLIX raised its prices by 20%. What do you think would happen to the demand for your popcorn with respect to this change in Netflix's subscription fees?"
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"I would expect the demand for microwave popcorn, with respect to the rise in the price of Netflix, to decrease as these two goods are COMPLEMENTS; when the price of Netflix rises, some customers will cancel their subscriptions, watch public TV instead, and go visit the cinema more often, which means fewer movie nights eating store-bought popcorn at home, decreasing demand, ceteris paribus."
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"So in this case we have a negative % (the decrease in demand) divided by a positive % (the increase in the price of Netflix), which 'ALWAYS' results in a NEGATIVE XED value; hence, in the case of COMPLEMENTS, the XED is always a NEGATIVE value."
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--TASK--
"In the above example, the substitute good (Netflix) raised its price, but what would happen if it lowered its price? Would the XED still be negative?" "Explain your answer."
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"Now what about the actual size of the XED values?"
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--TASK--
"Use the XED calculator below to complete these sentences."
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"If the % change in Qd is greater than the % change in price, the XED value is ALWAYS _____ than one and is therefore termed income-_____."
"If the % change in Qd is less than the % change in price, the XED value is ALWAYS _____ than one and is therefore termed income-_____."
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--TASK--
"Read the article below and identify two substitute goods, then explain the sign of the XED between premium coffee and cheaper coffee and whether you expect it to be high or low."
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--TASK--
"Read the article below and identify the two complementary goods, then explain the sign of the XED between them and whether you expect it to be high or low."
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"What would you do/not do if you knew your XED with another good was positive and very large?"
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"How does it impact your pricing
--TASK--
"Using the infographic above, explain how knowledge of XED with flight prices, is used by Oceanpark."
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"Using the infographic above, explain how knowledge of XED with Netflix, is used by Disney+."
--2.2.2 FORMULA--
--2.2.2 FORMULA--
PED
YED
XED
--2.2.3 SIGNIFICANCE OF VALUES & SIGNS --
--2.2.3 SIGNIFICANCE OF VALUES & SIGNS --
PED
YED
XED
--2.2.4 DESCRIPTIONS OF VALUES--
--2.2.4 DESCRIPTIONS OF VALUES--
--2.2.5 PED ALONG A LINEAR DEMAND CURVE--
--2.2.5 PED ALONG A LINEAR DEMAND CURVE--
--2.2.6 FACTORS AFFECTING PED, YED, & XED--
--2.2.6 FACTORS AFFECTING PED, YED, & XED--
--2.2.7 PED & TOTAL EXPENDITURE--
--2.2.7 PED & TOTAL EXPENDITURE--
--2.2.8 ELASTICITY VALUES & DECISION MAKING --
--2.2.8 ELASTICITY VALUES & DECISION MAKING --
PAPER 1 HIDE/REVEAL PRACTICE
PED-RELATED
The answer is 'D',
The answer is 'D',
The answer is 'D',
The answer is 'D',
XED-RELATED
The answer is 'D',
The answer is 'C',
The answer is 'D',
The answer is 'D',
The answer is 'D',
YED-RELATED
The answer is 'D',
The answer is 'D',
PED & TR-RELATED
The answer is 'D',
The answer is 'D',
The answer is 'D',
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Premium coffee and cheaper coffee brands.
Café-bought coffee and home-brewed coffee.
Arabica coffee and Robusta coffee.
Branded coffee and supermarket own-brand coffee.
Coffee and tea.
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Model answer:
"The sign of the XED between premium coffee and cheaper coffee must be positive, as the price of premium coffee rises, consumers switch to cheaper coffee brands, so the quantity demanded of cheaper coffee increases, and so both the changes are positive, meaning they are substitutes. Furthermore, we would expect the XED value to be relatively high, as premium coffee and cheaper coffee satisfy the same want, which is drinking coffee. They are therefore close substitutes. When the price of premium coffee rises, many consumers are willing to switch to a cheaper brand, leading to a relatively large increase in demand for the cheaper coffee."
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