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ELASTICITIES (CONTINUED)
AP MICROECONOMICS
UNIT 2, DAY 2
RIXIE
REVIEW: PRICE ELASTICITY OF DEMAND
• Measures consumer sensitivity to a change in price
DETERMINANTS OF PRICE ELASTICITY OF DEMAND
1.Substitutability
 The larger the number of substitute goods that are
available, the greater the price elasticity of demand.
 Ex: Nike shoes vs. Beyoncé concert tickets
DETERMINANTS OF PRICE ELASTICITY OF DEMAND
2. Proportion of Income
 The higher the price of a good relative to consumers’
incomes, the greater the price elasticity of demand.
 Ex: A car vs. a pack of gum
DETERMINANTS OF PRICE ELASTICITY OF DEMAND
3. Luxuries versus Necessities
 The more that a good is considered to be a “luxury”
rather than a “necessity,” the greater is the price
elasticity of demand.
 Ex: Jewelry vs. bread
DETERMINANTS OF PRICE ELASTICITY OF DEMAND
4. Time
 The longer the time period, the more elastic is
product demand.
 Ex: Rising gas prices and the switch to hybrid cars
CROSS ELASTICITY OF DEMAND
Measures how sensitive consumer purchases of one
product (X) are to a change in price of another product (Y)
IF CROSS ELASTICITY OF DEMAND IS:
Positive: X & Y are substitutes
 Sales of X move in the same direction as a change in price of Y
 Ex: Coke & Pepsi
Negative: X & Y are complements
 An increase in price of one good decreases the demand for the other.
 Ex: Cameras and film
Near-zero: X & Y are independent
 The goods are unrelated and the price change of one has no effect on the purchase
of the other
INCOME ELASTICITY OF DEMAND
Measures the degree to which consumers respond to a
change in their incomes by buying more or less of a good
IF INCOME ELASTICITY OF DEMAND IS:
Positive: normal (or superior) goods
 Quantity demanded of the product changes in the same direction as
change in income
 Ex: Televisions, cars, new name-brand clothing
Negative: inferior goods
 Quantity demanded of the product changes in the opposite direction
from change in income
 Ex: Used clothing, Ramen noodles, bus tickets
PRICE ELASTICITY OF SUPPLY
Measures producer sensitivity to a change in price
HOW ELASTIC IS SUPPLY?
(USE SAME RANGES AS ELASTICITY OF DEMAND)
 Es > 1
 Supply is Elastic
 Es = 1
 Supply is Unit Elastic
 Es < 1
 Supply is Inelastic
PRODUCERS BEING ABLE TO MODIFY SUPPLY IS HIGHLY
DEPENDENT ON THE TIME AVAILABLE…
 Market Period: Occurs when the time immediately after a
change in market price is too short for producers to respond
with a change in quantity supplied
 Supply curve could be perfectly inelastic (vertical), because quantity supplied
cannot change
 Regardless of a change in demand or a change in price, the quantity supplied
remains constant.
 Ex: tomato farmer brings a truckload of tomatoes to market (the entire season’s
output)
SHORT RUN
 Short Run: Too short a time period to change plant capacity, but long
enough to use more labor and/or resources to increase quantity
supplied
 Supply is somewhat more elastic
 Can change quantity supplied (within limits) as response to a predicted increase in
demand
 Ex: tomato farmer could predict change in demand and increase labor,
fertilizer, and pesticides
LONG RUN
 Long Run: A time period long enough for firms to adjust their plant
sizes and for firms to enter or leave the industry
 Supply is very elastic.
 Time to acquire larger facilities, buy land, buy more or better machinery
 Can greatly increase quantity supplied
 Ex: Tomato farmer can buy more land, machinery, equipment, and
therefore employ more workers
GRAPHICAL REPRESENTATIONS
CLASSWORK TO PRACTICE
 If you were absent last class (2/25), you need to complete questions 2, 4
& 5 (p. 370 - 371).
 Today, work on study questions 6, 7,12, 13, 14.