00:01
We're asked to write a paper on the effect of price change on complementary goods and we want some real life examples.
00:10
So we want to talk about cross elasticity of demand.
00:24
So the formula is the percentage change in quantity demanded of good a over percentage change of price of good b.
00:47
So it measures responsiveness of quantity demanded of one good when the price for another changes.
01:15
The cross elasticity of demand for complementary goods is negative.
01:33
Complementary goods are goods that are often purchased together.
01:56
So with a negative cross elasticity of demand when the price of one good increases, demand for the other decreases.
02:21
So demand will move in the same direction, though this makes sense because if we have a complementary good that becomes more expensive, people will purchase less of that good and then demand for the original good will also go down.
02:36
So an example would be mp3 player and earbuds.
02:48
These are often purchased together so they're complementary goods.
02:59
So we can illustrate it using supply and demand.
03:08
So let's say that this is going to be for the mp3 player.
03:15
Then we're told that the price of earbuds has gone up so they become more expensive.
03:24
So the demand for earbuds will go down.
03:27
The demand for the mp3 player will also shift to the left.
03:31
That causes equilibrium price to go down and quantity demanded at equilibrium to go down.
03:39
We also need to take into account other factors that affect demand.
04:07
So these include income, price, taste and preferences, prices of related goods and services, and expectations...