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X
The single largest determinant of XED
is the closeness of substitute or complement.
Urm, that's because you know,
if your weak substitute or complement,
the value is between 0 and 1,
and if it's a strong one it's above 1,
but the sign always confuses people
so always work yourself through this logic, urm puzzle.
For example between Coke and Pepsi,
now you know that they are subsitutes,
so what should happen?
Well, when the price of Coca-cola decreases,
the quantity demanded of Coca-cola increases,
and hence, less people will consume Pepsi.
The demand for Pepsi decreases.
Same direction here, subsitutes.
Again for complements, what happens?
Well let's say for complements like razors and shavers,
now when the price of shavers increase,
the quantity demanded of shavers, decrease.
And same thing for the demand of shavers,
urm, razors, will then decrease.
Opposite directions, complement.
So always work yourself through this,
don't just memorise it,
So why is this value for XED uh important?
Because firms need to know the XED of their product
when considering the effect
on the demand for their product
of a change in the, uh and, you know the effects
of a rival’s product or a complementary product.
These are vital information that CEOs will love to have.