Students need to be able to define cross price elasticity of demand and apply the correct formula to information on changing prices of two related products. In most questions, students are asked to apply the concept of cross price elasticity to a real world market, when there has been a change in the price of a substitute or a complementary product. Strong evaluation questions the likely relative strength of the cross price effect. For example, when consumers are willing and able to switch their demand, the substitution effect is likely to be high.

1. How Markets Work – Cross Price
Elasticity of Demand (XED)

2. How Markets Work
Cross Price
Elasticity of
Demand

3. What is Cross Price Elasticity of Demand?
• Substitutes:
– Substitutes are products in competitive demand
– With substitutes, an increase in the price of one good (ceteris
paribus) will lead to an increase in demand for a rival product
– The value of XED for two substitutes is always positive
• Complements:
– Complements are products in joint demand
– A fall in the price of one product causes an increase in demand
for the complementary product
– The value of Xed for two complements is always negative
Cross price elasticity (Xed) measures responsiveness of demand for
good X following a change in the price of a related good Y.
With elasticity questions – remember to write down the correct equation for a mark

4. Cross Price Elasticity of Demand (XED) Calculations
Beats Studio headphones retail at
approximately £200 per unit.
Following a change in price of the
headphones (an increase in £20),
there is an increase demand for a
rival brand of headphones by 5%
What is the XED of this price
change?
• % change in demand of Y = 5%
• % change in price of X = 10%
• Coefficient of PED = +0.5
• The two goods are fairly weak
substitute products
Table shows price and quantity
demanded of goods, X and Y
Price of X
Quantity
demanded
of X
Quantity
demanded
of Y
£30 400 250
£15 700 400
Calculate the XED for Y with respect
to the price of X.
• % change in price of X = -50%
• % change in demand for Y = +60%
• XED for good Y = -1.2
• The two goods are fairly close
complements
Changing prices and demand for Dr.
Beats headphones

5. Understanding the Coefficient of Cross Price Elasticity
• Substitutes:
– Close substitutes have a strongly positive cross price elasticity
of demand i.e. a small change in relative price causes a big
switch in consumer demand
• Complements:
– When there is a strong complementary relationship, the cross
elasticity will be highly negative.
– An example might be games consoles and software games
• Unrelated products:
– Unrelated products have zero cross elasticity e.g. the effect of
changes in taxi fares on the market demand for cheese!
The stronger the relationship between two products, the higher is
the co-efficient of cross-price elasticity of demand

6. Cross Price Elasticity of Demand - Substitutes
Close substitutes – small rise in price of X
causes large rise in demand for Y
Price
of S
Demand for T
P2
P1
Q1
Price
of X
Demand for Y
P2
P1
Q1 Q2
D
D
Q2
Weak substitutes – large rise in price of S
leads to small increase in demand for T

7. Cross Price Elasticity of Demand - Complements
Close complements: A small fall in price
of A causes a large rise in demand for B
Price
of E
Demand for F
P2
P1
Q1
Price
of A
Demand for B
P2
P1
Q1 Q2
D
D
Q2
Weak complements: A large drop in price
of E causes only small rise in demand for F

8. Cross Price Elasticity – Cinema Ticket Prices
Cinema ticket prices
Average annual price in the UK,
2000-2013
2000 4.40
2002 4.29
2004 4.49
2006 4.87
2008 5.20
2010 5.95
2013 6.53
Online streaming
Direct DVD Purchases
Pay TV – Films on
Demand e.g. Sky
Alternative
entertainments
including gaming
Substitute Factors
Food and drink prices
Apps to enhance the
customer experience
Discount programmes
for cinema-goers
Cost of parking /
transport
Complement Factors
Total UK cinema admissions remain
roughly stable, with 166m
admissions in 2013
Cinema ticket prices rising – but £6-
£7 is still a low price for an
evening’s entertainment?

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