How responsive is Y to changes in X?

X elasticity of Y means the responsiveness of Y to

changes in X.
Elasticity measures the change of one variable( Y) in
response to changes in another(X) while other things
influencing Y are held constant.

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More Elasticities of Demand

Cross Elasticity of Demand
The cross elasticity of demand is a measure of the
responsiveness of demand for a good to a change in the price
of a substitute or a complement, other things remaining the
same.
Ex: the cross elasticity of demand for pizza with respect to the
price of a soft drink
The formula for calculating the cross elasticity is:
Percentage change in quantity demanded
Percentage change in price of substitute or complement
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More Elasticities of Demand

The cross elasticity of demand for

a substitute is positive.
When the price of a burger increase, people increase their
demand for pizza.

a complement is negative.
When the price of a soft drink decrease, people increase
their demand for pizza.

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More Elasticities of Demand

Figure 4.6 shows the
increase in demand for
pizza when the price of
burger rises.
The figure also shows the
decrease in the demand
for pizza when the price of
a soft drink (a complement
of pizza) rises.

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More Elasticities of Demand

Income Elasticity of Demand
The income elasticity of demand measures the
responsiveness of the demand for a good to a change in
income, other things remaining the same.
The formula for calculating the income elasticity of
demand is
Percentage change in quantity demanded
Percentage change in income

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If the income elasticity of demand is greater than 0, the
good is a normal good.
If the income elasticity of demand is less than zero
(negative) the good is an inferior good.
EX of inferior good: public transportation, potatoes, rice

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More Elasticities of Demand

Within the group of normal good;
If the income elasticity of demand is greater than 1, demand is
income elastic.
The percentage of income spent on that good increases as
income increases. (EX: Luxuries)
If the income elasticity of demand is greater than zero but less
than 1, demand is income inelastic.
The percentage of income spent on that good decreases as
income increases(EX: Necessities).

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Numbers & Facts

Income elasticity in the US for,
Automobiles 2.98
Books 1.44
Restaurant Meals 1.40
Tobacco 0.64
Public Transportation 0.36
Margarine 0.20

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Elasticity of Supply
For example, when
demand increases, is the
change in the quantity
supplied small or large?
In Figure 4.7(a), an
increase in demand brings

A large rise in price

A small increase in the

quantity supplied

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Elasticity of Supply
In Figure 4.7(b), a same
amount of increase in
demand brings

A small rise in price

A large increase in the

quantity supplied

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Elasticity of Supply
The contrast between the two outcomes in Figure 4.7
highlights the need for
A measure of the responsiveness of the quantity
supplied to a price change.

The elasticity of supply measures the responsiveness of

the quantity supplied to a change in the price of a good
when all other influences on selling plans remain the
same.

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Elasticity of Supply
Calculating the Elasticity of Supply
The elasticity of supply is calculated by using the formula:
Percentage change in quantity supplied
Percentage change in price
EX: when price of pizza increases 10%, the quantity
supplied of pizzas per hour increase 20%, so the elasticity
of supply for pizza is 2.

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Elasticity of Supply

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Supply is perfectly inelastic

if the supply curve is
vertical.
The elasticity of supply is 0.
Ex: a Van Gogh painting

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Supply is perfectly elastic if

the supply curve is horizontal
The elasticity of supply is
infinite.
EX: a generic sandwich sold
at $1 each

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Supply is unit elastic if the

supply curve is linear and
passes through the origin.
Note that slope is irrelevant!

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Elasticity of Supply
The Factors That Influence the Elasticity of Supply
Resource Substitution Possibilities
The easier it is to substitute among the resources used to
produce a good or service, the greater is its elasticity of
supply.
Some goods or services can be produced only by using
unique or rare productive resources; while others can be
produced by using commonly available resources.

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Elasticity of Supply
Time Frame for Supply Decision
The more time that passes after a price change, the
greater is the elasticity of supply.
The more time that passes after a price change, the more
adjustment firms can make to change quantity supplied in
respond to a price change,

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Review Question(worth 3 points, due

Mon, Feb11)

2012 Pearson Addison-Wesley