The effects on the demand for product A caused by a change in the price of product B is Called____________

Step 1: Analyze the question The question asks about the effect on the demand for product A when the price of a different product, B, changes. The key phrase is "a change in the price of product B" affecting "demand for product A."

Step 2: Explain the concept Economists measure how responsive demand is to different factors:

• Price elasticity of demand: the response of quantity demanded to a change in the product's own price.
• Income elasticity of demand: the response to a change in consumers' income.
• Cross-elasticity of demand (XED): the response of the quantity demanded of one good (A) to a change in the price of another good (B).

Formula:

Cross elasticity = % change in quantity demanded of A ÷ % change in price of B

• If XED is positive, the goods are substitutes. Examples are Peak milk and Cowbell milk, or rice and pasta.
• If XED is negative, the goods are complements. Examples are bread and butter, or car and fuel.
• If XED is zero, the goods are unrelated.

Step 3: Check each option

• A. Joint demand: this describes goods demanded together, such as pen and ink. It describes a relationship between goods, not the effect of a price change on demand.
• B. Cross-elasticity of demand: this measures exactly how demand for A responds to a price change in B. ✔
• C. Elasticity of supply: this concerns the response of quantity supplied to price, so it is not relevant.
• D. Competitive demand: this describes demand for substitute goods, but it is not the measure of the effect of a price change.

Step 4: Answer The correct answer is B. Cross-elasticity of demand.

Exam tip: Remember "Cross = Other." If the question involves the price of a different good affecting demand for another, think cross-elasticity. If it involves the good's own price, think price elasticity. If it involves income, think income elasticity.