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Lesson 12: Elasticity and Demand | Unit 5: Other Measures Page: 24 of 25

Topic: Cross Elasticity Of Demand <=PAGE BACK | PAGE NEXT=>

  • How responsive is my demand to this change in my other prices? To answer these questions, we need the cross elasticity of demand.

  • Cross elasticity of demand is the relative response of the demand for one good to changes in the price of another good.
  • Or stated in percentage terms: the cross elasticity of demand is the percentage change in demand for one good resulting from a percentage change in the price of another good.

  • The cross elasticity of demand is a handy numerical measure commonly used by economists to identify complement and substitute goods:

    • For a substitute good, cross elasticity is positive, meaning that an increase in the price of one good leads to an increase in demand for the other good.

    • For an complement good, cross elasticity is negative, meaning that an increase in the price of one good leads to a decrease in demand for the other good.

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MARGINAL REVENUE CURVE, PERFECT COMPETITION

A curve that graphically represents the relation between the marginal revenue received by a perfectly competitive firm for selling its output and the quantity of output sold. Because a perfectly competitive firm is a price taker and faces a horizontal demand curve, its marginal revenue curve is also horizontal and coincides with its average revenue (and demand) curve. A perfectly competitive firm maximizes profit by producing the quantity of output found at the intersection of the marginal revenue curve and marginal cost curve.

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