• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Explain, with examples, the significance of the value of a goods cross-elasticity of demand in relation to its substitutes and complements. [8]

Extracts from this document...

Introduction

Transfer-Encoding: chunked Explain, with examples, the significance of the value of a good?s cross-elasticity of demand in relation to its substitutes and complements. [8] The term cross-elasticity of demand is a measure of the responsiveness of the quantity demand of a good in relation to a change in the price of another good, and is measured by dividing the percentage change in the quantity demanded of a good by the percentage change in the price of another good. As such, a negative value indicated complements while a positive value indicates substitutes. Beyond this, the magnitude of the value will indicate how strong the relationship is between the two products, a higher value would indicate very close complements or substitutes while a lower value would indicate a weak relationship. ...read more.

Middle

Thus the cross-elasticity of demand for Pepsi and Coca-Cola is likely to be a very high positive value. Alternatively, in the case of weak substitutes such as motorcycles and cars, while we can expect some shift in demand when the price of either goes down, the cross elasticity is likely to be fairly low as there is not a great deal of overlap between car and motorcycle customers, thus, while a fall in the price of either will cause some customers to switch over, this change in demand is likely to be disproportionately lower than the change in price. When it comes to complements, the cross elasticity of two good will always be negative, meaning that a fall in the price of one good will cause an increase in the demand for the other. ...read more.

Conclusion

the price of phones will cause an extension in the demand for cases which will in turn lead to more potential buyers of cases and in turn more cases being bought. Other complements will likely have very close cross elasticities in relation to each other. One such example can be computer components. The cross elasticity of demand for RAM memory to processors is likely to not only be very high, but also likely to be incredibly close to the cross elasticity of demand for processors in relation to the price of RAM. This is because when purchasing such components, the customer is most likely looking to build a computer, and, as a computer cannot operate without all components, they are equally important, and as such, their cross elasticities will likely be very similar. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Markets & Managing the Economy section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Markets & Managing the Economy essays

  1. This case study will examine the regulatory failure of antitrust laws in relation to ...

    Baxter signed a Stipulation of Dismissal that stated the government's charges were without merit. His reasoning for dismissing the case was that Antitrust Division's view regarding Section 2 of the violations had evolved since the commencement of the lawsuit; the government was backing off antitrust actions.

  2. For a duopoly involving homogeneous products, explain and contrast a Cournot, Stackelberg and Bertrand ...

    output of the other firm and since each firm believes its rival will continue to produce that output, it has no incentive to vary its own output. This means in a Cournot Equlibrium, each firm is maximising its profits given its expectations of the output choice of the other firm, which are confirmed.

  1. What are the origins of the Pension Crisis and what can be done to ...

    Many believe the Financial Services Authority, the Industry Body and the Government are to blame for providing poor market information by failing to highlight to workers the risks involved in investing in personal pension funds, for example, there isn't much information about how expensive pension schemes can knock tens of thousands of pounds off its value.

  2. Discuss whether the elasticity of supply of manufactured goods is likely to be greater ...

    This once again leads manufactured goods to have a higher price elasticity of supply as it is easier for their producers to adjust production in relation to price changes as they are not locked in to producing a certain good for long periods of time.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work