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HomeHomework HelpeconomicsCross Price Elasticity

Cross Price Elasticity

Cross price elasticity of demand measures how the quantity demanded of one good changes in response to a price change of another good.

intermediate
2 hours
Economics
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Overview

Cross price elasticity of demand is a vital concept in economics that helps us understand how the demand for one product can be affected by the price change of another product. It is particularly useful for businesses in determining how to price their products and understand market dynamics. By anal...

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Key Terms

Demand
The quantity of a product that consumers are willing to buy at different prices.

Example: When the price of apples decreases, the demand for apples increases.

Elasticity
A measure of how much the quantity demanded or supplied changes when there is a change in price.

Example: If a 10% increase in price leads to a 20% drop in demand, the elasticity is -2.

Substitutes
Goods that can replace each other; when the price of one rises, the demand for the other increases.

Example: Butter and margarine are substitutes.

Complements
Goods that are often used together; when the price of one rises, the demand for the other decreases.

Example: Peanut butter and jelly are complements.

Cross Price Elasticity
The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

Example: If the price of coffee rises by 10% and the demand for tea increases by 5%, the cross price elasticity is 0.5.

Market Analysis
The process of studying market conditions to understand the dynamics of supply and demand.

Example: Companies conduct market analysis to determine pricing strategies.

Related Topics

Price Elasticity of Demand
Focuses on how quantity demanded changes with price changes for the same good.
beginner
Supply and Demand
Explores the relationship between supply and demand in markets.
beginner
Market Structures
Examines different types of market environments and their characteristics.
intermediate
Consumer Theory
Studies how consumers make choices based on preferences and budget constraints.
intermediate

Key Concepts

substitutescomplementselasticitydemand