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    D GVTC GZPB GUu ZG9 Je A

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    D GVTC GZPB GUu ZG9 Je A

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    D GVTC GZPB GUu ZG9 Je A

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    of 3

    WEEK 8

    CROSS ELASTICITY OF DEMAND


    CONTENT
     Definition
     Types (Positive and Negative)
     Measurement of Income Elasticity of Demand
    DEFINITION: Cross Elasticity of Demand is the degree of responsiveness of quantity
    demanded of commodity X to a little change in the price of commodity Y. Cross
    elasticity of demand is applicable mainly to goods that are close substitute as well
    as complementary goods. For example the demand for Milo will increase as a result
    of an increase in the price of Bournvita, all other things being equal.
    Mathematically, cross elasticity of demand can be expressed as
    % change in quantity demanded of commodity X
    % change in price of commodity Y

    TYPES OF CROSS ELASTICITY OF DEMAND


    Positive Cross Elasticity of Demand: With substitute goods, the cross elasticity of
    demand is always positive, ( ie greater than zero), which means it is Elastic. This
    positive relationship is high with close substitutes and low with substitutes not very
    close.

    Negative Cross Elasticity of Demand: With complementary (or jointly demanded


    goods), eg car and petrol, the cross elasticity of demand is always negative ( ie less
    than zero), which means it is Inelastic. Here, too, a high negative cross elasticity of
    demand indicates that the goods involves are highly complementary and, vice versa,
    i.e, a low negative cross elasticity of demand means that the goods concerned are
    not highly complementary.

    EVALUATION
    1. Briefly explain cross elasticity of demand
    2. Differentiate between complementary goods and substitute goods in relation
    to cross elasticity of demand

    Illustration:
    The table below shows the response of quantity demanded to changes in price for
    two pairs of commodities. Use the table to answer the questions that follow:
    Commodities Changes in Commodities Changes in Quantity
    Price Demanded
    Old# New# Old kg New kg
    Bread 25 40 Yam 1000 3000
    Liter of petrol 50 100 Car 400 250
    Calculate the cross elasticity of demand for : (i) Bread and Yam, (ii) Petrol and Car.

    SOLUTION:
    i. Cross elasticity of demand for bread and yam
    Let x = yam, y = bread
    Old demand = 1000kg, New demand = 3000kg
    Change in demand = 3000 – 1000 = 2000kg
    2000 x 100
    = 1000 1 = 200%
    Old price = #25, New price = #40
    Change in price = 40 – 25 = #15
    15 x 100
    25 1 =60%
    CE = 200
    60 = 3.3%
    ii. Cross elasticity of demand for petrol and car
    Let x = car, y = petrol
    Old demand = 400, New demand = 250
    Change in demand = 400 – 250 = 150cars
    150 x 100
    400 1 = 37.5%
    Old price = #50, New price = #100
    Change in price = 100 – 50 = #50
    50 x 100
    50 1 = 100%
    CE = 37.5
    100 = 0.4%

    EVALUATION
    1. How would you deduce complementary goods from a calculation of cross
    elasticity?
    2. WAEC June 2000 Question No 2.

    READING ASSIGNMENT
    1. Comprehensive Economics Page 124 – 127
    2. Fundamentals of Economics Page 227 – 236

    GENERAL EVALUATION QUESTIONS


    1. What are capital goods
    2. Explain five reasons why a joint stock company is preferable to a one-man
    business.
    3. State the law of Diminishing returns.
    4. Define Labour as a factor of production.
    5. What are the factors affecting the size of a firm?
    6. Distinguish between fixed and variable cost
    WEEKEND ASSIGNMENT
    1. When the coefficient of cross elasticity of demand is less than zero, it
    indicates.....? (a) complementary goods (b) composite goods (c) derived goods (d)
    competitive goods
    2. The proportionate change in quantity demanded of commodity A in response
    to a change in price of commodity B is............... (a) arc elasticity of demand
    (b) price elasticity of demand (c) cross elasticity of demand (d) income
    elasticity of demand
    3. The cross elasticity of demand for close substitute goods is always....... (a)
    inelastic (b) zero (c) elastic (d) indeterminable
    4. The numerical value that shows the proportionate change in demand to a
    change in price of goods is known as ............. (a) coefficient of multiplier (c)
    coefficient of elasticity (c) coefficient of accelerator (d) coefficient of
    indexation
    5. The measurement of cross elasticity of demand for complementary goods
    is.... (a) inelastic (b) zero (c) elastic (d) indeterminable

    SECTION B
    1. How is cross elasticity of demand measured?
    2. Shoe the nature of cross elasticity of demand for : (i) substitute goods, (ii)
    complementary goods

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