Download Module 48 Supplemental Material for AP

MODULE 48: Other Elasticities
AP Microeconomics
Before you read the module:
Summary
The previous modules addressed price elasticity of demand. This module explains how elasticity is used to
understand the relationships between other important variables in economics. It presents cross-price
elasticity, income elasticity, and price elasticity of supply.
Module Objectives
Objective 1. The meaning and importance of the income elasticity of demand, a measure of the
responsiveness of demand to changes in income.
Objective 2. How the cross-price elasticity of demand measures the responsiveness of demand for one good
to changes in the price of another good.
Objective 3. The significance of the price elasticity of supply, which measures the responsiveness of the
quantity supplied to changes in price.
While you read the module:
Key Terms
Define these key terms as you read the module.
Cross-price elasticity of demandIncome elasticity of demandIncome-elastic demandIncome-inelastic demandPrice elasticity of supplyPerfectly inelastic supplyPerfectly elastic supplyAfter you read the module:
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A change in the price of a related good shifts the demand curve of the original good, reflecting a
change in the quantity demanded at any given price. The strength of such a “cross” effect on demand
can be measured by (1) ____________ elasticity. When the cross-price elasticity is positive, it tells us
the two goods are (2) ______________. The cross-price elasticity for two goods that are used
together, like flashlights and batteries would be (3) ____________.
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The income elasticity of demand measures how a change in income will affect the (4) ___________
demanded for a good. The income elasticity of demand is positive for a(n) (5)_____________ good
and negative for a(n) (6)_______________ good.
The two most important factors that affect the price elasticity of supply for a good are (7) __________
and (8)______________.
Module Review
Using the General Concept to Learn Some Other Elasticities
This module introduces some other elasticities. If you have learned the general approach to elasticity, all
you need to do now is identify the two relevant variables involved in each of these new elasticities and decide
which is the independent variable and which is the dependent variable. The cross-price elasticity is very
similar to the price elasticity of demand, but instead of looking at the effect on the quantity demanded of a
good from a price change of that good, it looks at the effect on the quantity demanded of a good from a price
change of another good. The effect is across goods, hence the name cross-price elasticity. Quantity
demanded is the dependent variable and price is the independent variable (just as with the price elasticity of
demand)—but the price and quantity are for two different goods. Why would we care about two different
goods? They must be related goods for the quantity of one to respond to a change in the price of another.
Remember that we studied related goods in Section 2—compliments and substitutes. We are interested in
the cross-price elasticity because it tells us about the relationships between two goods.
The income elasticity of demand looks at effects on the quantity demanded from changes in income
rather than price. The two relevant variables are quantity and income—with income as the independent
variable. As we look at what happens to quantity when income changes, we are learning whether the good is
a normal good or an inferior good. Remember from Section 2that a change in income can cause demand to
increase or decrease, depending on what type of good we are studying.
Finally, the price elasticity of supply looks at the relationship between price and quantity supplied. Again,
price is the independent variable. But here, we consider the responsiveness of the quantity supplied to
changes in price. We learned in Section 2 that there is a positive relationship between price and the quantity
supplied. The price elasticity of supply gives us more detail about that relationship.
Keep in mind that the negative sign is dropped from the value of the price elasticity of demand. But
remember that whether the income elasticity of demand or the cross-price elasticity is negative or positive is
very important. Keep your increases and decreases straight when working with these two elasticities. The
sign, (positive or negative) is an important part of what we want to know!
According to the law of supply, the price elasticity of supply will be positive. With both the price elasticity
of demand and the price elasticity of supply, we are interested in the range of elasticity: elastic, inelastic, or
unit-elastic.
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Economists calculate a variety of elasticities because these measures provide important insights into
the relationship between two different variables. All elasticities are calculated as the ratio between
the percentage change in quantity (either the quantity demanded or the quantity supplied) to the
percentage change in some other related variable. Elasticities are unit-free, making them an ideal
measure of the sensitivity of one variable to changes in another variable.