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2 35 Elasticity MARKET FORCES (3.3) 36 MARKET FORCES (3.3) mind-map 2 Mind-maps are very good revision tools. Our minds learn by making patterns. Mind-maps help you to make these patterns and so makes the content easier to learn and remember. BEFORE you start this unit (in pencil) ... •write the key idea of this unit in the centre of the page •write what you know about this idea around it and draw lines to them. •try and group the ideas together AFTER you finish this unit (in pencil) ... •remove anything that doesn’t belong to this unit •ensure that things are grouped together appropriately. Move stuff around if needed •add any extra ideas that you think are missing MARKET MARKET FORCES FORCES (3.3) (3.3) unit over view 37 37 e id s e iv it s n e s r u f ind yo Demand curves show the relationship between price of a good or service, and the quantity that consumers are willing and able to buy. Similarly supply shows the relationship between price and quantity supplied. This relationship is not the same for all goods or services. Consumers and producers are more sensitive to changes in the price for some goods or services, than others.This sensitivity is referred to as elasticity. This unit looks at three types of elasticity: • • • price elasticity of demand and supply income elasticity of demand cross elasticity of demand by the end of this unit, you should be able to answer these questions... 1 what is price elasticity and how do I calculate it? elasticity 2 what is income elasticity and how do I calculate it? 3 what is cross elasticity and how do I calculate it? 2 38 2 MARKET FORCES (3.3) MARKET FORCES (3.3) (3.3) MARKET FORCES 39 1 . 2 topilacsticity pr ice e name your price As consumers we are often - but not always very sensitive to price. For example if commuters pass three petrol stations on the way home, and the one that they usually buy at raises its price, they will most likely go to another petrol station. However if the price of pencils rose by 10% would you change brands? This topic looks at what makes consumers sensitive or not, to changes in price ... and the implication of this for firms. producers are sensitive also The law of supply states that firms are also sensitive to changes in price, but how much. Just like demand, we can also measure the sensitivity of producers to changes in price - i.e. their price elasticity of supply. This topic also shows how to calculate price elasticity of supply, and what factors affect this. by the end of this topic, you should be able to... o describe price elasticity of demand o compare firms’ revenue to determine price elasticity of demand o calculate the coefficient of price elasticity of demand o identify factors that influence price elasticity of demand o define and calculate price elasticity of supply o show momentary, short-run and long-run supply remember - try the exercises and then read the notes to learn what you don’t know. 2 Price Elasticity of Demand 40 MARKET FORCES (3.3) Imagine two green grocers , both of whom face the same demand curve. One, however, specialises in giving extra service (e.g. free deliveries) and so sells less produce but at a higher price. The other says “forget about service, I want sales, sales, sales” . . . and so sells her produce at cheaper prices. Their products are otherwise exactly the same and so face the same demand curve. 1. Use the demand schedule below to construct the market demand curve on the axis to the right. Price $/kg QD ($/kg) (kg/month) 16 14 12 10 8 6 4 1 000 2 000 3 000 4 000 5 000 6 000 7 000 Q (kg/month) 2. Joe sells his produce at $14/kg. Show this on the graph and label it PJ and QJ . 2 3. Betty sells her produce at $6/kg. Show this on the graph and label it PB and QB . 4. Both Joe and Betty decide to lower their prices by $2/kg. Show this on the graph above. 5. Over the price ranges shown, calculate the coefficient of price elasticity of demand. ____________________________________________________________________________________________ 6. Describe the price elasticity of demand over each price range. $6 - 4 _________________________________________________________________________________ $14 - 12 _________________________________________________________________________________ 7. Each producer has changed their price by $2/kg and this has resulted in an increase in quantity of 1 000 kg/ month. Yet the coefficients of elasticity are different. Explain why. Exercise 2.1 ____________________________________________________________________________________________ 8. State what each producer should do in terms of their pricing strategy. Joe ____________________________________________________________________________________ Betty____________________________________________________________________________________ 9. Summarise the connection between price elasticity of demand, changes in price and total revenue. ____________________________________________________________________________________________ 10.Complete the following table: Price Range Elasticity Coefficient Elasticity $4 - $6 $6 - $8 $8 - $10 $10 - $12 $12 - $14 $14 - $16 Identify whether the following different approaches. 41 demand curves are price elastic or inelastic using the 1. Determine whether the lost income or gained income is greater. (Circle your answer.) 2. Calculate the firm’s total revenue before and after the price change. 3. Calculate the coefficient of price elasticity. $ a. Visual Analysis: Loss / Gain is greater Revenue Analysis: Before: $___________________ After: $___________________ Coefficient: __________________________________ Demand is price . . . b. Visual Analysis: $ 50 loss $ 30 gain D inelastic / unit elastic / elastic Loss / Gain is greater Price Elasticity & Revenue MARKET FORCES (3.3) 12 Q 15 2 $ Revenue Analysis: 90c Before: $___________________ After: $___________________ Coefficient: __________________________________ Demand is price . . . 70c inelastic / unit elastic / elastic Loss / Gain is D gain 210 Q 270 Exercise 2.2 c. Visual Analysis: loss $ greater Revenue Analysis: 50 Before: $___________________ After: $___________________ Coefficient: __________________________________ Demand is price . . . loss 30 D inelastic / unit elastic / elastic gain 12 30 Q 42 MARKET FORCES (3.3) Answer the following questions. Price Elasticity A student who worked for a pizza takeaway noted that when the company lowered the price of large pizzas from $14.00 to $11.00, sales increased from 2300 to 3 500 per week. 1. Use the midpoint formula to calculate the price elasticity of demand coefficient for pizzas over the price range of $14.00 to $11.00. (Show your working.) Coefficient for price elasticity of demand: _____________ (Rounded to 2 dp). 2. Using your result from (1.), identify whether the demand for pizza is price elastic or price inelastic. 2 Demand for pizza is price: ______________________ 3. Suggest the most likely reason for the coefficient you calculated in (1.) above. ____________________________________________________________________________________________ ____________________________________________________________________________________________ ____________________________________________________________________________________________ 4. ‘Price-cutting’ by pizza companies to increase sales (and therefore revenue) suggests pizza companies believe the demand for their pizzas is price elastic. Explain why. ____________________________________________________________________________________________ ____________________________________________________________________________________________ Exercise 2.3 ____________________________________________________________________________________________ ____________________________________________________________________________________________ From 2012 to 2013, the consumption of beef in New Zealand declined by 12% and lamb by 8%. In the same period, the consumption of chicken increased by 6%. 3. Assume the prices of lamb and beef rose by 4% over the same period of time. Calculate the coefficient for the price elasticity of demand for beef. Show your workings. Price Elasticity Coefficient = ________________ 4. Assume that the price coefficient calculated in (1.) is correct. What has happened to the Total Revenue of beef producers? ____________________________________________________________________________________________ 43 Answer the following questions. 1. Elasticity of Supply is higher . . . a. b. c. d. when fixed costs are low. when fixed costs are high. in the short-run. in the long-run. 2. The long-run supply curve for a commodity is more elastic than the short-run supply curve because . . . a. firms can vary all of their inputs in the long-run. b. the short-run reflects firms entering and exiting the industry. c. scarcity means the long-run supply is fixed. d. firms will be at equilibrium in the long-run. 3. From 2009 to 2013, the price of rubber bands rose from $1.30 per box to $1.60 per box. Over the same period quantity supplied increased from 2 million boxes sold to 3 million boxes sold. Use this information to calculate the coefficient of price elasticity of supply. Price Elasticity of Supply MARKET FORCES (3.3) PeS = ________________ 4. What factors would influence the price elasticity of supply for rubber band suppliers? ____________________________________________________________________________________________ ____________________________________________________________________________________________ 2 ____________________________________________________________________________________________ Alfred Marshall developed the economic theory that price elasticity of supply is linked to time periods. Graph 1:THE MARKET SUPPLY FOR LAMB Sa P Sb Q 5. Assume that lamb prices have increased. With reference to Graph 1, which of the three supply curves for lamb is the most appropriate for a period of one year? Supply Curve: _____________________ 6. Justify your answer to question 5. ____________________________________________________________________________________________ ____________________________________________________________________________________________ ____________________________________________________________________________________________ Exercise 2.4 Sc 44 MARKET FORCES (3.3) Price Elasticity notes Describe Price Elasticity of Demand (PeD) Imagine you own a local shop that sells goods for $10 each. Each day you sell 100 goods earning you $1 000 revenue. If you drop your price by $1, you will increase your sales but will earn less per good. Should you drop your price? It depends. You will sell more but because you will earn less per sale, your revenue may fall. You need to find out whether the increase in sales is greater than the income you lose on existing sales. Let’s assume that dropping the price by $1 would increase sales by 10% each day. Table 1 below shows the overall effect of this on revenue. Table 1: COMPARISON OF REVENUE Price Quantity Revenue Before $10 100 $1 000 After $9 110 $990 The increase in the quantity of sales has not compensated for the loss of income per sale. People have responded to the drop in price but not sufficiently to increase revenue. 2 How much people react to a change in a factor (such as the price of a good) is called elasticity. Price elasticity of demand is a specific type of elasticity. It measures how much quantity demanded changes following a change in the price of a good or service. If demand for a good is price elastic, this means that consumers are very sensitive to changes in price. Dropping the price will cause sales to rise enough to generate an increase in total revenue. Conversely, raising the price will cause quantity demanded to fall so much that total revenue will fall. If demand is price inelastic, customers are not very sensitive to changes in price, e.g. a price rise will only see quantity demanded fall slightly. When demand is price inelastic, firms should raise their prices to increase total revenue. There are two ways to determine the price elasticity of demand – compare the revenue before and after a price change or calculate the coefficient of elasticity. Elasticity: The sensitivity or responsiveness of quantity demanded or supplied to a change in another factor, e.g. price. Price Elasticity of Demand: The responsiveness of quantity demanded to changes in the price. MARKET FORCES (3.3) 45 Compare Firms’ Revenue to Determine PeD This approach can best be shown graphically on a demand curve. $ Figure 2.1 ... Determining Price Elasticity using Revenue 50 In this example, the firm decides to halve its price to attract more customers. . . . at $40, QD = 2 . . . Revenue = $80 . . . at $20, QD = 3 . . . Revenue = $60 P1 40 The decrease in price has resulted in revenue falling. Over the price range of $20 to $40, demand is said to be ‘price inelastic’. 30 Note: A quick look at the graph will show you the same thing. The shaded areas represent the revenue lost (light grey) compared to revenue gained (dark grey). More revenue is lost than gained. P2 20 10 D 1 2 Q1 3 Q2 4 Q • If price falls and revenue falls (or vice versa) then demand is said to be price inelastic. • If price rises and revenue stays the same, then demand is said to price unit elastic. • If price falls and revenue rises (or vice versa) then demand is said to be price elastic. Calculate the Coefficient of PeD The second approach compares the percentage change in quantity demanded to the percentage change in price. The most common approach is to use the mid-point approach. The formula for this is as follows: QD2 - QD1 Mid-Point Approach: (QD2 + QD1) ÷ 2 P2 - P1 (P2 + P1) ÷ 2 Repeating the example above but using the mid-point approach to calculating the coefficient of price elasticity, we get the following results: 3-2 1 (3 + 2) ÷ 2 2.5 0.4 20 - 40 -20 -0.67 (20 + 40) ÷ 2 30 -0.60 (2dp) This answer tells us that over the price range analysed, demand is price inelastic. You will notice that the coefficient is negative. This is because the law of demand states that as price rises, quantity demanded falls (and vice versa), i.e. price and quantity demanded have a negative relationship. 2 46 MARKET FORCES (3.3) However, we are not concerned about the negative. We are concerned about the size of the coefficient as Table 2 shows: Coefficient 0 -1 Table 2: PRICE ELASTICITY OF DEMAND Price Elasticity Explanation A rise in price will cause revenue to increase. Demand is price inelastic. A fall in price will cause revenue to fall. Firms should increase price. rise in price will not affect revenue. Demand is price unit elastic. A Firms should not change price. -1 -1 - ∞ A rise in price will cause revenue to fall. A fall in price will cause revenue to increase. Firms should decrease price. Demand is price elastic. Note #1 The price elasticity of demand is reflected in the slope of the curve but does not equal it. Take the example given in Figure 2.2 below. Figure 2.2 ... Comparing Price Elasticity of Demand $/unit 2 P1 50 P2 40 This graph shows two price changes. In both cases, the price drops by $10 and QD rises by 1 unit. PeD = - 3.0 Despite the change in QD being the same in both cases, the coefficient of elasticity differs. This occurs because price elasticity measures the relative (percentage) changes, not absolute changes. 30 P3 20 P4 10 PeD = - 0.33 D 1 Q1 2 Q2 3 4 Q3 5 Q4 Q Note #2: Some simple ways to remember the mid-point formula are: difference %∆Q %∆P or average difference average Q P Of course these are simplifications of the real formula. Q refers to QD and the percentage change is calculated using the mid-point approach, not the end-point approach. MARKET FORCES (3.3) 47 Note #3 Another way to remember the different coefficients of price elasticity is the following diagram. $ Figure 2.3 ... Coefficients of Price Elasticity of Demand I ∞ As PeD tends towards 0 . . . or the demand curve gets closer to vertical . . . then demand is price inelastic (I for inelastic). E 0 As PeD tends towards ∞ . . . or the demand curve gets closer to horizontal . . . then demand is price elastic (E for elastic). Q Like the other memory tricks, be careful with this. It is a memory aid, not an absolute rule. Identify Factors that Influence PeD A number of different factors affect the price elasticity of demand. Four main factors that affect price elasticity of demand are: 1.Necessity of Good / Service If we must have a good, e.g. water, we will be prepared to pay any price for it ... demand will be price inelastic. 2.Availability of Substitutes If there are plenty of substitutes, consumers will be very sensitive to changes in price ... demand will be price elastic. 3.Price as a Proportion of Income If the price of the good is small compared to consumers’ income, they are less likely to worry about changes in price, e.g. the price of salt or coffee ... demand will be price inelastic. 4.Time Period The longer the time frame that we consider, the more able consumers are to find a substitute for a good or service. Therefore they are less willing to pay a higher price for a good. 2 48 MARKET FORCES (3.3) Define and Calculate Price Elasticity of Supply (PeS) We also need to consider the price elasticity of supply. Price elasticity of supply tells us how able suppliers are to increase production in response to an increase in price (or vice versa). Price elasticity of supply is also calculated using the mid-point approach, as shown below: QS2 - QS1 (QS2 + QS1) ÷ 2 Mid-Point Approach: P2 - P1 (P2 + P1) ÷ 2 Show Momentary, Short-Run and Long-Run Supply The responsiveness of supply depends on the availability of resources. If firms find it difficult to get extra resources or to reduce the resources they use (e.g. labour) then supply will be price inelastic, i.e. firms find it difficult to respond to changes in price. The amount of time that suppliers have to respond to a price change greatly affects the elasticity of supply. There are three time periods to consider when analysing the price elasticity of supply: 2 Momentary Supply This refers to a firm’s ability to change output immediately (within the next few minutes or hours). Because firms cannot do this, momentary supply is shown as perfectly inelastic. Short-Run Supply In the short-run, firms can change some but not all resources. This means that they have some ability to change output in response to a change in price. Long-Run Supply In the long-run, all factors of production (resources) are variable. If consumers want more of a good or service, firms can meet their wants. Long-run supply is shown as elastic. $ Figure 2.4 ... Price Elasticity of Supply Momentary Supply Short-Run Supply The price elasticity of supply changes according to the time period. This graph summarises the three types of supply curve - momentary, short-run and long-run. Long-Run Supply Q Momentary supply is perfectly price inelastic. In contrast long-run supply is typically price elastic as all resources are variable. MARKET FORCES (3.3) MARKET FORCES (3.3) income & 49 49 2 . 2 c i top mand e d f o y sticit ela s s o r c if I were a rich man ... How and what consumers buy is also influence by their income. Income elasticity of demand (YeD) measures how sensitive consumers’ demand is to a change in their income. X marks the spot A third form of elasticty is cross elasticity (XeD). This measures how sensitive consumers’ demand is to changes in the price of other goods or services. As we will see, this helps us determine whether goods are complements, substitutes or independent. by the end of this topic, you should be able to... o define and calculate income elasticity of demand (YeD) o describe inferior, normal and luxury goods o show YeD on a demand graph o define and calculate cross elasticity of demand (XeD) o describe complements, substitutes, and independent goods o show XeD on a demand graph remember - try the exercises and then read the notes to learn what you don’t know. 2 Income Elasticity of Demand 50 MARKET FORCES (3.3) Calculate the income elasticity of the following goods and then place them on the continuum below. Bach Muesli (5% rise in income . . . 13% rise in sales) (8% rise in income . . . 19% rise in sales) YeD = _______ YeD = _______ House Bananas (5% rise in income . . . 7% rise in sales) (2% rise in income . . . 1.4% rise in sales) YeD = _______ YeD = _______ Kitset Vegetable Garden Barbeque (5% fall in income . . . 4% rise in sales) (10% rise in income . . . 23% rise in sales) YeD = _______ YeD = _______ 2 INFERIOR GOODS NORMAL GOODS luxury goods 0 1 1. When we draw price elasticity of demand, we compare two points on a demand curve. How would you show income elasticity? On the graph below, show changes to the demand curve that illustrate the income elasticity of demand for barbeques and bananas (nb scale is not important). Bananas Barbeques $ Exercise 2.5 $ P1 P1 D Q1 D Q Q1 Q 2. Identify two firms that sell what you would consider to be luxury goods and how they would respond if the Government were to announce income tax cuts. ____________________________________________________________________________________________ ____________________________________________________________________________________________ ____________________________________________________________________________________________ 51 Cross-Elasticity is a very important concept for businesses to understand. Take a supermarket for example, where the costs of the products they get in vary from day-to-day and week-to-week. Managers in this setting have to be very careful that dropping the price of one good does not adversely affect sales of other goods or brands. 1. Calculate the cross-elasticity of the following products sold at Waitakere MegaValue Hypermarket and determine their economic relationship. Bananas and Grapes (bananas fell from $2.00/kg to $1.60/kg . . . sales of grapes fell 4%) XeD = ____________ Grapes and Bananas are ____________________ Instant Coffee and Plunger Coffee (the price of plunger coffee rose by 12% . . . sales of instant coffee rose by 5%) XeD = ____________ Instant Coffee and Plunger Coffee are ____________________ Rat Poison and Ginger Beer (the price of rat poison rose by 8% . . . sales of ginger beer rose by 0.02%) XeD = ____________ Cross Elasticity of Demand MARKET FORCES (3.3) 2 Rat Poison and Ginger beer are ____________________ 2. Even though independent goods (e.g. _________________ and _________________) have no cross elasticity, the change in the price of one could still affect the demand for other goods. For example, how could the price of houses affect the demand for yachts even though they are independent? ____________________________________________________________________________________________ 3. Identify and explain the cross-elasticity of demand between chips and drinks sold in a bar: Elasticity: _________________________________________________________________________________ Explanation:_________________________________________________________________________________ _________________________________________________________________________________ 4. In your own words, explain why a firm that sells multiple goods or services (e.g. a supermarket), must be aware of the cross-elasticity of its various products. Your answer should clearly refer to the firm’s revenue. ____________________________________________________________________________________________ ____________________________________________________________________________________________ ____________________________________________________________________________________________ ____________________________________________________________________________________________ ____________________________________________________________________________________________ Exercise 2.6 ____________________________________________________________________________________________ Income & Cross Elasticity 52 MARKET FORCES (3.3) Income and cross elasticity are important factors for firms when deciding their marketing strategies. 1. Draw a line to match the type of elasticity of demand with the most appropriate type of goods. ELASTICITY TYPE OF GOODS Price elasticity is largeComplements Income elasticity is positive Expensive goods (relative to income) Income elasticity is negativeInferior goods Cross elasticity is positiveNormal goods Cross elasticity is negativeSubstitutes 2. During an economic downturn, demand for restaurants decreases and demand for takeaways increases. Explain why this occurs, and what it indicates about the income elasticity of demand for these goods. ____________________________________________________________________________________________ 2 ____________________________________________________________________________________________ ____________________________________________________________________________________________ ____________________________________________________________________________________________ ____________________________________________________________________________________________ 3. Explain why some goods have a higher income elasticity of demand than others. ____________________________________________________________________________________________ ____________________________________________________________________________________________ ____________________________________________________________________________________________ Exercise 2.7 ____________________________________________________________________________________________ ____________________________________________________________________________________________ 4. What factors would affect the cross elasticity of two (or more) goods or services? ____________________________________________________________________________________________ ____________________________________________________________________________________________ ____________________________________________________________________________________________ ____________________________________________________________________________________________ ____________________________________________________________________________________________ 53 Answer the following multiple choice questions: 1. Suppose that an increase in consumer income of 5% causes the consumption of a particular good to fall from 10 to 6 units. The income elasticity of demand is: a.-10 b.-6 c.5 d.6 2. An inferior good is one for which . . . a. the quantity demanded will only increase if the price falls. b. a higher price has relatively little effect on the quantity demanded. c. the income elasticity is positive but less than 1. d. an increase in income results in a lower quantity demanded. 3. Which of the following goods would be most likely to have an income elasticity of greater than one? a. Wine b.Cigarettes c. White bread d.Heating Define the following terms. Check that you can define each term and use it in an appropriate context. complementary goods______________________________________________________________________ ______________________________________________________________________ cross elasticity of demand ______________________________________________________________________ ______________________________________________________________________ Income & Cross Elasticity MARKET FORCES (3.3) 2 income elasticity of demand ______________________________________________________________________ ______________________________________________________________________ independent goods______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ normal good______________________________________________________________________ ______________________________________________________________________ substitute goods______________________________________________________________________ ______________________________________________________________________ Exercise 2.8 inferior good______________________________________________________________________ 54 MARKET FORCES (3.3) Income & Cross Elasticity of Demand notes Define and Calculate Income Elasticity of Demand (YeD) Income elasticity of demand is calculated using the mid-point approach but we use changes in income rather than price. The formula is given below. Q D2 - Q D1 (QD2 + QD1) ÷ 2 Mid-Point Approach: Y2 - Y 1 (Y2 + Y1) ÷ 2 Describe Inferior, Normal and Luxury Goods The results you get for the coefficient for income elasticity may be either positive or negative. Table 3 summarises the significance of the coefficient of income elasticity. 2 Coefficient Table 3: INCOME ELASTICITY OF DEMAND Price Elasticity Explanation YeD < 0 Good is inferior. A rise in income causes demand to fall. A fall in income will cause demand to rise. 0 < Y eD Good is normal. A rise in income causes demand to rise. A fall in income will cause demand to fall. Good is necessity. A rise in income causes demand to rise slightly. A fall in income will cause demand to fall slightly. Good is luxury. A rise in income causes demand to rise a lot. A fall in income will cause demand to fall a lot. 0 < YeD < 1 1 < Y eD Show YeD on Demand Curves Income elasticity refers to the impact of a non-price factor on demand, i.e. a change in income results in a shift of the entire demand curve. Figure 2.5 ... Income Elasticity of Demand $/unit P1 Income elasticity refers to how much the entire demand curve shifts, as shown in Figure 2.5. D1 An increase of income results in a shift of demand to the right. The size of the shift illustrates the income elasticity of demand. D Q1 Q2 Q Define and Calculate Cross Elasticity of Demand (XeD) Income Elasticity of Demand: The responsiveness of demand to changes in the income. Cross elasticity of demand is used to compare the impact of another good’s price on the demand for MARKET FORCES (3.3) 55 a good or service. This is particularly relevant in large stores such as supermarkets. For example, lowering the price of pears may result in decreased apple sales. Alternatively, lowering the price of paper plates, may result in more sales of plastic knives and forks. We use the mid-point approach to calculate cross elasticity but use changes in the price of the second good. The formula is as follows: QDA2 - QDA1 Mid-Point Approach: (QDA2 + QDA1) ÷ 2 PB2 - PB1 (PB2 + PB1) ÷ 2 Describe Complements, Substitutes and Independent Goods The results you get for the coefficient for cross elasticity may be either positive or negative. Table 4 summarises the significance of the coefficient of cross elasticity. Coefficient Table 4: CROSS ELASTICITY OF DEMAND Price Elasticity Explanation XeD < 0 The two goods are complements. A rise in the price of the other good will cause demand of this good to fall (and vice versa). XeD = 0 The two goods are independent. A rise in the price of the other good will have no effect on demand for this good. XeD > 1 The two goods are substitutes. A rise in the price of the other good will cause demand of this good to rise (and vice versa). Show XeD on Demand Curves Like income elasticity, cross-elasticity is illustrated on a demand curve as a shift of the whole demand curve. The larger the shift due to a change in price of another good or service, the greater the cross elasticity of demand. Figure 2.6 ... Cross Elasticity of Demand $/unit P1 D1 D Q1 Q2 Q An increase of the price of a substitute causes demand for a good to shift to the right, as consumers buy less of the substitute and more of this good. The size of the shift illustrates the income elasticity of demand. Cross Elasticity of Demand: The responsiveness of demand for one good to a change in the price of another good. 2 56 MARKET FORCES (3.3) UNIT 2 Elasticity Unit Content: Understanding 1 (poor) 2 2.1 Price Elasticity • Describe Price Elasticity of Demand (PeD) • Compare Firms’ Revenue to PeD • Calculate the Coefficient of PeD • Identify Factors that Influence PeD • Define and Caluclate Price Elasticity of Supply (PeS) • Show Momentary, Short-Run and Long-Run Supply 2.2 Income and Cross Elasticity of Demand • Define and Calculate Income Elasticity of Demand • Describe Inferior, Normal and Luxuray Goods • Show Income Elasticity on Demand Curves • Define and Calculate Cross Elasticity of Demand • Describe Complements, Substitutes and Independent Goods 2 • Show Cross Elasticity on Demand Curves checklist: I have ... done a mind-map of the main ideas (before and after I’ve done the work) tried (and marked) all of the exercises watched the online videos of this work read the notes and summarised the key ideas in the margins of the pages made (or downloaded from quizlet) flashcards of the key ideas and definitions relevant current events and examples: relevant events and examples for this unit are: I didn’t really get the following parts of this unit ... ... and I’m going to ask ___________________ to help me with this 3 (good)