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Other Demand Elasticities
Demand may respond to changes in other variables. The measures of
such responses are also elasticities.
A. Cross-Price Elasticity of Demand: The percentage
change in the quantity demand for one good, divided by the
percentage change in price of another good. Have goods as X &
Y
a) Measures the degree to which goods are substitutes or
complements.
i.
If the cross-price elasticity is positive, then the
goods are substitutes: i.e., exy >0, then goods are
substitutes; tea and coffee.
ii. If the cross price elasticity is negative, then the
goods are complements: i.e., exy < 0, then goods
are complements; coffee & cream
iii. If the cross price elasticity is zero, then the goods
are unrelated: i.e., exy = 0, then goods are
unrelated- for example, women shoes & men shoes
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Other Demand Elasticities
B.
Income Elasticity of Demand (ey): the percentage change in the
quantity demanded divided by the percentage change in income.
i.
Normal goods: goods for which the income elasticity
of demand is positive: i.e. ey >0; example: BMW
Inferior goods: Goods for which the income elasticity
of demand is negative: i.e. ey < 0; example: Spam
ii.
Necessities and Luxuries
A.
B.
Goods with lower income elasticities are often called
necessities, since the quantities demanded don’t vary
much with income. Typical income elasticities are 0.4 or 0.5.
Goods with higher income elasticities are often called
luxuries, since people give them up readily when their
incomes fall. Typical elasticities are 1.5 to 2.0.
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The Price Elasticity of Supply
The price elasticity of supply is the percentage change in the quantity
supplied divided by the percentage change in price.
%Q S
es 
%P
Price Elasticity of Supply and Shape of Supply Curve
A. The price elasticity of supply is either zero or a positive
number.
B. A zero price elasticity of supply means that the
quantity supplied will not vary as the price varies.
C. A positive price elasticity of supply means that as the
price of an item rises, the quantity supplied rises.
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Supply Curve
Shapes and Elasticity
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Supply Elasticities in the Long and Short Runs
The shape of the supply curve depends primarily on the length of time
being considered.
a)
In the short run, at least one of the resources used in
production cannot be changed, thus, eS<1
b) In the long run, the firm has long enough to change
any aspect of production, and therefore can more fully
respond, thus, eS>1
Interaction of Price Elasticities of Demand and Supply
A.
B.
C.
Both the price elasticity of demand and the price elasticity of
supply determine the full effect of a price change.
If the price elasticity of supply of an item is large and the demand
for it is price inelastic, then the firm can raise the price without
losing revenue: i.e. if thus, eS>1 but thus, eD<1, then a P↑→TR↑
Conversely, if the price elasticity of supply is small and the price
elasticity of demand is large, then the firm is unable to raise the
price because the consumer will switch to another firm or product:
i.e. if thus, eS<1 but thus, eD>1, then a P↑→TR↓
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Elasticity of Labor Demand
• Suppose wages goes up by 5% and as a
result employment falls by 2%. Then the
elasticity of labor demand is 0.4 which
implies labor demand is INELASTIC since
the percentage change in employment is
less than the percentage change in wages
• What is  is wages go up by 2% and
employment declines by 3%?
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