Microeconomics

Table of Contents

1. Topic pack - Microeconomics - introduction
2. 1.1 Competitive Markets: Demand and Supply
3. 1.1 Competitive Markets: Demand and Supply - notes
4. 1.1 Competitive markets - questions
5. 1.1 Competitive markets - simulations and activities
6. 1.2 Elasticities
7. 1.2 Elasticities - notes
   1. Price elasticity of demand (PED)
   2. PED values
   3. Determinants of price elasticity
   4. Calculating PED
   5. Elasticity along a straight line demand curve
   6. Elasticity and revenue
   7. PED - primary vs manufactured
   8. PED and taxation
   9. Cross elasticity of demand
   10. XED and business decisions
   11. Income elasticity of demand
   12. YED and business decisions
   13. Price elasticity of supply
   14. Possible PES values
   15. PES - calculation
   16. Determinants of PES
   17. PES - primary vs manufactured
8. Section 1.2 Elasticities - questions
9. Section 1.2 Elasticities - simulations and activities
10. 1.3 Government intervention
11. 1.3 Government Intervention - notes
12. 1.3 Government intervention - questions
13. 1.3 Government intervention - simulations and activities
14. 1.4 Market failure
15. 1.4 Market failure - notes
16. Section 1.4 Market failure - questions
17. Section 1.4 Market failure - simulations and activities
18. 1.5 Theory of the firm
19. 1.5 Theory of the firm - notes (HL only)
20. Section 1.5 Theory of the firm - questions
21. Section 1.5 Theory of the firm - simulations and activities
22. Print View

XED and business decisions

Syllabus: Examine the implications of XED for businesses if prices of substitutes or complements change.

Let´s Do Some Economics

Cross elasticity of demand: relevance for firms

Cross elasticity of demand (XED) is a measure of the responsiveness of demand for one good (good A) to a change in the price of another (good B). Can you write down the FORMULA? Follow the link to check your answer.

The numerical value of the XED will depend on the relationship between the goods in question. If the goods are either substitutes or complements, the numerical value of the XED will be much larger than if the two goods bear little relation to each other; i.e. a change in the price of one good will have a significant impact on the demand for the other good. This will be important for business decision making.

Substitutes

For example, consider two manufacturers of different brands of tennis shoes (for example Nike and ASICS) which are close substitutes for each other.       

A decision by Nike to lower price will, other things being equal, lead to an increase in the demand for ASICS tennis shoes. If ASICS leaves their price unchanged, they are likely to experience an increase in sales as ASICS will become relatively cheaper compared with Nike. Should ASICS also increase their price or leave it unchanged - this is now a hugely important decision for ASICS.

Can you name 5 other markets that have close substitutes (yes any markets that have distinct brands - NB Coke and Pepsi is muito chato try for some originality and applicability in choosing examples.

Market for Beef                            Market for Chicken

Price of beef falls demand for Chicken Falls (D to D1)

Complements

Conversely, consider the case of two goods that are complements, petrol and cars. This is a very complex relationship. The true complement to petrol in the short term is car use. The higher the price of petrol the less people use their cars - hopefully this is reasonably obvious.

In the longer term changes in the price of petrol will alter the pattern of demand within the car market. If the price of petrol rises and stays higher then people, when they come to change their cars, will look for cars that are more economic in terms of petrol usage:Swapping `gas-guzzlers´ for smaller cars, for example. THey could even look to altrnative fuels driven cars.

Market for Cellphones                  Market for payment plans

The price of cellphones falls, demand for payment plans increases (D to D1)