A Level Economics AQA Practice Exam

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What does cross price elasticity of demand measure?

Response of demand for one good to changes in the price of another good
Relationship between quantity supplied and price of a good
Effect of consumer income on demand for a product
Variation in demand due to seasonality factors

The correct answer is: Response of demand for one good to changes in the price of another good

Cross price elasticity of demand specifically measures how the quantity demanded of one good responds to changes in the price of another good. This concept is particularly important when analyzing substitute and complementary goods. For example, if two goods are substitutes, an increase in the price of one will typically lead to an increase in demand for the other, resulting in a positive cross price elasticity. Conversely, if two goods are complements, an increase in the price of one will likely decrease the demand for the other, indicating a negative cross price elasticity. Understanding this relationship helps economists and businesses make informed decisions regarding pricing, production, and marketing strategies. The other options touch upon different concepts within economics. The relationship between quantity supplied and the price of a good is explored through the concept of price elasticity of supply. The effect of consumer income on the demand for a product relates to income elasticity of demand. Lastly, variation in demand due to seasonality factors pertains to seasonal demand fluctuations rather than cross price relationships.