Download Micro_Module 48-12

Module
Micro: 12
Econ: 48
Other Elasticities
KRUGMAN'S
MICROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• How cross-price elasticity of demand measures the
responsiveness of demand for one good to changes
in the price of another good.
• The meaning and importance of the income
elasticity of demand, a measure of the
responsiveness of demand to changes in income.
• The significance of the price elasticity of supply,
which measures the responsiveness of the quantity
supplied to changes in price.
• The factors that influence the size of these various
elasticities.
Other Elasticities
• Cross-price elasticity of
demand
• For example, suppose the
price of gasoline were to
increase. The producers of
large trucks and SUVs will be
very interested to know how
this might affect sales of these
vehicles. A cross-price
elasticity of demand would be
used to measure this
response.
Other Elasticities
• Income elasticity of
demand
• Suppose the economy is
suffering a recession and
personal incomes are lower.
The airline and hotel industries
would be interested to know
how this would affect the
demand for air travel and hotel
rooms. An income elasticity of
demand would be used in this
case.
Other Elasticities
• Price elasticity of supply
• On the supply side of the
market, producers would
like to increase output if
the price of their goods
was to rise. A price
elasticity of supply would
be useful in measuring this
response.
Cross-Price Elasticity of
Demand
• Measures the responsiveness of the
demand for good “X” to changes in the price
of good “Y”
Exy = %∆ Qd of X / %∆ P of Y
• Substitutes (positive)
• Complements (negative
Cross-Price Elasticity of
Demand
• If cross elasticity is positive, then X and Y are substitutes.
• Example: The price of Nike shoes increases 2% and quantity
demanded for Converse shoes increases 4%.
• EConverse, Nike = 4%/2% = 2.
• If cross elasticity is negative, then X and Y are complements.
• Example: The price of gasoline increases 20% and quantity
demanded for large SUVs decreases by 5%.
• ESUV,gasoline = -5%/20% = - .25.
• Note: if cross elasticity is zero, then X and Y are unrelated,
independent products.
Income Elasticity of Demand
• Measures the responsiveness of demand for a
good to changes in income.
Ei = %∆ Qd / %∆ I
• Normal good (positive)
• Inferior good (negative)
Income Elasticity of Demand
• A positive income elasticity indicates a normal
good.
• Example: American consumer income falls by
2% and quantity of flights to Europe declines by
8%.
• Ei = 8%/2% = 4
Income Elasticity of Demand
• A negative income elasticity indicates an inferior
good.
• Example: Consumer income falls by 5% and
consumers increase consumption of Spam by
4%.
• Ei = 4%/(-5%) = -.80
Price Elasticity of Supply
• Measures the responsiveness of quantity
supplied to changes in price.
Es = %∆ Qs / %∆ P
• If Es >1, supply is considered elastic.
• If Es < 1, supply is considered inelastic.
• If Es = 1, supply is considered unit elastic.
Factors Influencing Price
Elasticity of Supply
• Determinants of Price Elasticity of Supply
• Availability of inputs (labor, capital and raw
materials.
• Time
Factors Influencing Price
Elasticity of Supply
• Time
• The short-run supply elasticity is more elastic
than the market period and will depend on the
ability of producers to respond to price
changes as to how elastic it is.
• The long-run supply elasticity is the most
elastic, because more adjustments can be
made over time and quantity can be changed
more relative to a small change in price.
Figure 48.1 Two Extreme Cases of Price Elasticity of Supply
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Table 48.1 An Elasticity Menagerie
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers