Explain how the value of the cross price elasticity of demand (XED) for a particular good is determined by its relationship to other goods.

Examine the significance of both cross price elasticity of demand and income elasticity of demand for a firm.

Answers may include:

• definition of XED
• diagram(s) to show the impact of XED, eg using shifts of demand when there is a change in price of another good, or price of X/quantity of Y type diagrams to show substitutes and complements
• explanation in terms substitutes (positive XED), complements (negative XED) and no relationship/a weak relationship/a strong relationship (ie magnitude)
• examples of goods which are substitutes/complements.

NB Candidates can only be awarded Level 4 if they consider both positive/negative and make at least some brief reference to magnitude, ie a maximum of Level 3 for consideration of just one or the other.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of XED and YED
• diagrams to show the significance of XED and YED for a firm
• explanation of the significance of XED and YED for a firm
• examples of the significance in practice
• synthesis or evaluation (examine).

Examination may include: relative importance of other factors which may affect firms, eg PED, the importance of the business cycle for YED, the degree to which XED and YED can be measured in reality, the tendency of YED and XED to change over time, the possibility of mergers between firms that produce substitute goods, the possibility of collaboration between firms that produce complementary goods.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.