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Consumer Behavior and Demand Chapter 3 Characteristics of Consumer Behavior Human wants are insatiable More is preferred to less Utility Utility is defined as the amount of satisfaction received from a good or bundle of goods. Cardinal measures of utility Numbers provide a measure of how much more you like one good over another Ordinal measure of utility Numbers provide a measure preference ranking Cardinal versus Ordinal measures Law of Diminishing Marginal Utility As a person consumes additional units of a product, they derive less satisfaction from each additional unit. Marginal Utility is equal to the additional utility derived from consuming one more unit of a good. Utility from Pizza Pizza Slices Total Utility Marginal Utility 1 2 3 4 5 6 5 9 12 14 15 15 Utility from Pizza Pizza Slices Total Utility 1 2 3 4 5 6 5 9 12 14 15 15 Marginal Utility 5 Utility from Pizza Pizza Slices Total Utility 1 2 3 4 5 6 5 9 12 14 15 15 Marginal Utility 5 4 Utility from Pizza Pizza Slices Total Utility 1 2 3 4 5 6 5 9 12 14 15 15 Marginal Utility 5 4 3 2 1 0 Utility from Trucks 4x4 Trucks 1 2 3 4 Total Utility Marginal Utility 500 850 1075 1175 500 350 225 100 Let’s throw in a John Deere tractor 4x4 Trucks 1 2 3 4 One big green machine Total Utility Marginal Utility 500 850 1075 1175 1175 500 350 225 100 0 Now let’s try that Kubota 4x4 Trucks 1 2 3 4 One big orange machine Total Utility Marginal Utility 500 850 1075 1175 200,000,000 Wow, would you look at that! 500 350 225 100 199,999,825 Choices in Consumption Let’s move from one good to two now Pizza Slices 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 . This dot represents a consumption bundle for the consumer In math it is an ordered pair and can be calculated like this (# Cokes, # Pizzas) 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 . (1,7) This dot represents a consumption bundle for the consumer In math it is an ordered pair and can be calculated like this (# Cokes, # Pizzas) Therefore this bundle of goods is made up of one coke and seven pizza slices 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 . . Several Ordered Pairs = (# Cokes, # Pizzas) These represent different consumption bundles for the consumer . . . 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 . . (1,7) . . . 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 . . (1,7) (2,5) . . . 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 . . (1,7) (2,5) . . . (10,1) 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 . . (1,7) (2,5) . . (6,2) . (10,1) 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 . . (1,7) (2,5) . (3,3) . (6,2) . (10,1) 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 . . (1,7) (2,5) . (3,3) . (6,2) . (10,1) 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 This line is called an indifference curve 5 4 3 2 1 It can be labeled I or U for Utility Curve I 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 Every point on an indifference curve gives the consumer the same level of utility or satisfaction 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 Indifference curves are: Continuous 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 Indifference curves are: Continuous This one is not continuous 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 Indifference curves are: Continuous Convex to the origin 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 Indifference curves are: Continuous Convex to the origin 5 4 3 2 This is not convex to the origin 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 Indifference curves are: Continuous Convex to the origin Fill the plane and never cross 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 Indifference curves are: Continuous Convex to the origin Fill the plane and never cross 5 4 3 These cross and just make a mess. 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Why can’t they cross? Choices in Consumption Pizza Slices 7 6 5 The farther the indifference curve is away from the origin the better off the consumer is. The more of each good they have:-) 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices Better Off 7 6 5 4 3 Worse Off 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 Indifference curves are convex to the origin this gives us the Law of Diminishing Marginal Rate of Substitution What is means is that we are willing to give up fewer and fewer slices of pizza to get an additional coke 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 Remember I said we are constrained, in other words we can’t get everything we want. How is that represented on this graph? 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 Let’s say we have $10 to spend a day on pizza and coke, what does that constraint look like? Well we need to know a couple other things like what are the prices of coke and pizza. 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 If the price of pizza is $2 a slice how many can we afford if we spend all our money income on pizza? 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 . If the price of pizza is $2 a slice how many can we afford if we spend all our money income on pizza? The answer is 5 slices. 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 If the price of coke is $1 a glass how many can we afford if we spend all our money income on coke? 4 3 2 1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 If the price of coke is $1 a glass how many can we afford if we spend all our money income on coke? The answer is 10 cokes. 4 3 2 1 . 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 . These are the two endpoints of what is known as a budget constraint. You can afford to purchase one or the other. 4 3 2 1 . 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 . The budget constraint shows every possible combination of goods that the consumer can purchase with a certain money income. In this case it’s $10 3 2 1 . 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 . How do we answer the question of how consumers choose how much of each to consume? Remember what a utility curve represents? 4 3 2 1 . 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 . . A Which point do you think the consumer will choose A, B or C? Why did you choose that point? . B .. I2 C I1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 . . A Which point do you think the consumer will choose A, B or C? Why did you choose that point? . B .. I2 C I1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 What happens to the budget constraint when the price of a good changes? 5 4 3 2 1 BC 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 If the Price of Coke doubles to $2.00 the budget constraint moves. More specifically it rotates clockwise with the Pizza slice endpoint staying the same. It rotates until the coke endpoint is on 5. 3 2 1 BC 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 This is because we can only afford 5 cokes if when spend all of our income on coke now. 4 3 2 1 BC2 BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 What happens in a case where the prices of both pizza and coke double? 4 3 2 1 BC 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 What happens in a case where the prices of both pizza and coke double? The new budget constraint shifts inward with the endpoints 2.5 pizza slices and 5 cokes. It is a parallel shift. 3 2 1 BC2 BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 How does our consumption change now? 5 4 3 2 1 BC2 BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 How does our consumption change now? 5 4 3 2 . A 1 BC2 BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 How does our consumption change now? We move from point A to Point B. 6 5 4 3 2 1 . . A B BC2 BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 Now lets go back to the example where the price of coke goes from $1 to $2. How does that affect consumption? 4 3 2 1 BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 Now lets go back to the example where the price of coke goes from $1 to $2. How does that affect consumption? 4 3 2 1 BC2 BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 Now lets go back to the example where the price of coke goes from $1 to $2. How does that affect consumption? . BC2 BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 Now lets go back to the example where the price of coke goes from $1 to $2. How does that affect consumption? . . BC2 BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 Now lets go back to the example where the price of coke goes from $1 to $2. How does that affect consumption? 6 5 4 3 2 1 . BC2 BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Substitution Effect - when the price of a good changes relative to another good, we substitute consumption towards the good that has become relatively less expensive. Income Effect - When the price of a good decreases the consumers real income has risen, thus creating the potential for consumption of both goods to increase. Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 Now lets see how we can use this utility analysis to map out a demand curve for this consumer . We start here with the price of coke at $1. When the price is $1 the consumer buys 5 cokes and 2.5 slices of pizza. BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 Now lets have the price of coke increasing from $1 to $2. How does that affect consumption? . . BC2 BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 Coke consumption goes from 5 units down to 3 units. The price goes up, consumption goes down. (Follows the Law of Demand) . . BC2 BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 Now lets map out this consumer’s demand curve. . . BC2 BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 Now lets map out this consumer’s demand curve. . . BC2 How many cokes will this consumer buy at a price of $1……. 5 Cokes BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Price Coke $ 3.50 3.00 2.50 2.00 1.50 1.00 . (5, $1.00) .50 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Pizza Slices 7 6 5 4 3 2 1 . . BC2 How many cokes will this consumer buy at a price of $2……. 3 Cokes BC1 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Price Coke $ 3.50 3.00 2.50 2.00 1.50 1.00 . (3, $2.00) . (5, $1.00) .50 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Price Coke $ 3.50 3.00 2.50 2.00 1.50 1.00 . (3, $2.00) . (5, $1.00) .50 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Price Coke $ 3.50 3.00 2.50 2.00 1.50 1.00 .50 . (3, $2.00) . (5, $1.00) Demand Curve for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Now we need to be able to determine the market demand curve for a product like this coke for an individual. Choices in Consumption Now we need to be able to determine the market demand curve for a product like this coke for an individual. The market demand curve is the horizontal summation of all individual demand curves for that particular good. Choices in Consumption Price Coke $ 3.50 3.00 2.50 2.00 1.50 1.00 .50 . (3, $2.00) . (5, $1.00) Jane’s Demand Curve for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Price Coke $ 3.50 3.00 2.50 2.00 1.50 1.00 .50 . (2, $1.50) . (5, $1.00) Bill’s Demand Curve for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Price Coke $ 3.50 3.00 2.50 2.00 1.50 1.00 .50 . . (2, $1.50) (3, $2.00) . (5, $1.00) Bill’s Demand Curve for Coke Jane’s Demand Curve for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Price Coke $ 3.50 3.00 2.50 2.00 1.50 1.00 .50 . (3, $2.00) . . (2, $1.50) . (4, $1.50) (5, $1.00) Bill’s Demand Curve for Coke Jane’s Demand Curve for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke Choices in Consumption Price Coke $ 3.50 3.00 2.50 2.00 1.50 1.00 .50 . (3, $2.00) . (6, $1.50) . (10, $1.00) Market Demand Curve for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke Types of Demand Types of Demand Elastic Demand - When the quantity response is relatively large compared to the price change. Types of Demand Price Coke $ 3.50 Elastic Demand - When the quantity response is relatively large compared to the price change. 3.00 2.50 2.00 1.50 1.00 Elastic Demand .50 1 2 3 4 5 6 7 8 9 10 11 12 Coke Types of Demand Price Coke $ 3.50 3.00 Elastic Demand - When the quantity response is relatively large compared to the price change. If you lower price total revenue increases 2.50 2.00 1.50 1.00 Elastic Demand .50 1 2 3 4 5 6 7 8 9 10 11 12 Coke Types of Demand How is total revenue calculated? Types of Demand How is total revenue calculated? It is the price of the product times the quantity sold Types of Demand Price Coke $ 3.50 When Price = $2 3.00 2.50 . 2.00 1.50 1.00 .50 Total Revenue = $8 1 2 3 4 5 6 7 8 9 10 11 12 Elastic Demand Coke Types of Demand Price Coke $ 3.50 3.00 When Price = $1 2.50 2.00 1.50 1.00 .50 Total Revenue = $12 . 1 2 3 4 5 6 7 8 9 10 11 12 Elastic Demand Coke Types of Demand Inelastic Demand - When the quantity response is relatively small compared to the price change. Types of Demand Price Coke $ 3.50 Inelastic Demand - When the quantity response is relatively small compared to the price change. 3.00 2.50 2.00 1.50 1.00 .50 Inelastic Demand 1 2 3 4 5 6 7 8 9 10 11 12 Coke Types of Demand Price Coke $ 3.50 3.00 Inelastic Demand - When the quantity response is relatively small compared to the price change. If you lower price total revenue decreases 2.50 2.00 1.50 1.00 .50 Inelastic Demand 1 2 3 4 5 6 7 8 9 10 11 12 Coke Types of Demand Remember total revenue is calculated by the price of the product times the quantity sold Types of Demand Price Coke $ 3.50 3.00 . When Price = $3 2.50 2.00 1.50 Total Revenue =$6 1.00 .50 Inelastic Demand 1 2 3 4 5 6 7 8 9 10 11 12 Coke Types of Demand Price Coke $ 3.50 When Price = $1 3.00 2.50 2.00 1.50 1.00 .50 Total Revenue = $5 . Inelastic Demand 1 2 3 4 5 6 7 8 9 10 11 12 Coke Types of Demand Price Coke $ 3.50 When Price = $1 3.00 2.50 2.00 1.50 1.00 .50 Total Revenue = $5 . Inelastic Demand 1 2 3 4 5 6 7 8 9 10 11 12 Coke Types of Demand Elasticity of Demand is considered to be Unitary when the Percentage changes in price and quantity demanded are the same. In this case an increase in price doesn’t change the level of income. Types of Demand How do you calculate the Elasticity of Demand? %Change in Quantity Price Elasticity of Demand = % Change in Price Types of Demand How do you calculate the Elasticity of Demand? Q2 - Q1 Q2 + Q1 Price Elasticity of Demand = P2 - P1 P2 + P1 Price Elasticity of Demand Ed > 1, Elastic Ed < 1, Inelastic Ed = 1, Unitary Elastic One important note is that all of these elasticities are negative, So we just take the absolute value of them. The sign for a Price elasticity is meaningless. Factors That Influence Demand Elasticities How many close substitutes there are for the product Whether or not there are many alternative uses for the product Whether the product is a major expenditure in the consumers budget Factors That Influence Demand Elasticities What is the difference between a Change in Quantity Demanded and a Change in Demand? A change in Quantity Demanded Price Coke $ 3.50 3.00 2.50 2.00 1.50 1.00 .50 . Demand for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke A change in Quantity Demanded Price Coke $ 3.50 3.00 . Price goes up from $1 to $3 and the Quantity Demanded goes down from 5 cokes to 2. 2.50 2.00 1.50 1.00 .50 . Demand for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke A change in Quantity Demanded Price Coke $ 3.50 3.00 . Notice the demand curve did not change, However the consumer’s position on that Demand curve did change. 2.50 2.00 1.50 1.00 .50 . Demand for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke A change in Quantity Demanded Price Coke $ 3.50 3.00 2.50 . A change in Quantity Demanded implies A movement along the demand curve. A price increase implies that Quantity Demanded decreases. 2.00 1.50 1.00 .50 . Demand for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke A Change in Demand Price Coke $ 3.50 3.00 . A change in Demand implies A movement of the the demand curve. 2.50 2.00 1.50 1.00 .50 Demand for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke A Change in Demand Price Coke $ 3.50 3.00 . A change in Demand implies A movement of the the demand curve. 2.50 2.00 1.50 1.00 .50 New Demand for Coke Demand for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke A Change in Demand Price Coke $ 3.50 3.00 2.50 2.00 . . A change in Demand implies A movement of the the demand curve. Now at $3 the consumer demands 4.5 units instead of the initial 2. 1.50 1.00 .50 New Demand for Coke Demand for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke A Change in Demand Price Coke $ 3.50 3.00 2.50 2.00 1.50 1.00 .50 . . A change in Demand implies A movement of the the demand curve. Now at $3 the consumer demands 4.5 units instead of the initial 2. Demand is said to have risen For this product. New Demand for Coke Demand for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke What Creates Changes in Demand? Population Income Tastes and Preferences Related Product Prices People’s Expectations A Change in Demand from Population Price Coke $ 3.50 3.00 An increase in Population shifts the demand curve outward. 2.50 2.00 1.50 1.00 .50 New Demand for Coke Demand for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Coke A Change in Demand from Income Price Steak $ 3.50 3.00 An increase in Income shifts the demand curve for Steak to the right 2.50 2.00 1.50 1.00 .50 New Demand for Steak Demand for Steak 1 2 3 4 5 6 7 8 9 10 11 12 Steak A Change in Demand from Income Price Spam $ 3.50 3.00 An increase in Income shifts the demand curve for Spam or Rice to the left 2.50 2.00 1.50 1.00 .50 New Demand for Spam Demand for Spam 1 2 3 4 5 6 7 8 9 10 11 12 Spam A Change in Demand from a Change in Tastes and Preferences Price Health Food $ 3.50 An increase in Health Concerns shifts the demand curve for Health Food to the right 3.00 2.50 2.00 1.50 1.00 .50 New Demand for Health Food Demand for Health Food 1 2 3 4 5 6 7 8 9 10 11 12 Q Health Food A Change in Demand from a Change in the price of a Related Good Price Coke $ 3.50 An increase in the price of Pepsi shifts the demand curve for Coke to the right 3.00 2.50 They are Substitutes 2.00 1.50 1.00 .50 New Demand for Coke Demand for Coke 1 2 3 4 5 6 7 8 9 10 11 12 Q Coke A Change in Demand from a Change in the price of a Related Good Price Hamburgers $ 3.50 3.00 2.50 An increase in the price of French Fries shifts the demand curve for Hamburgers to the left They are Complements 2.00 1.50 1.00 .50 New Demand for Hamburgers Demand for Hamburgers 1 2 3 4 5 6 7 8 9 10 11 12 Q Hamburgers A Change in Demand from a Change in Consumer’s Expectations Price Gasoline $ 3.50 3.00 If consumers expect there to be a shortage On gasoline, then the demand curve for Gasoline will shift to the right. 2.50 2.00 1.50 1.00 .50 New Demand for Gasoline Demand for Gasoline 1 2 3 4 5 6 7 8 9 10 11 12 Q Gasoline Income Elasticities % Change in Quantity of Product Income Elasticity = % Change in Income of Consumer Income Elasticities Engel Curve – The relationship between the consumers income and the quantity he or she purchases of an item. Engel Curve for Food Quantity Food Purchased 1 2 3 4 5 6 7 8 9 10 11 12 Weekly Income in 000’s Engel Curve for Clothing Quantity Clothing Purchased 1 2 3 4 5 6 7 8 9 10 11 12 Weekly Income in 000’s Income Elasticities Q2 - Q1 Q2 + Q1 Income Elasticity = I2 - I1 I2 + I1 Income Elasticities Ei > 0, Normal Good Ei < 0, Inferior Good Ei> 1, Luxury Ei< 1, Necessity Cross Price Elasticities Cross Price Elasticities measure the responsiveness Of Demand for good 1 to a change in the price of good 2 Answers the question: How does the quantity demanded of coke Change from a change in the price of pepsi? Cross Price Elasticities Coke and Pepsi For Substitutes: An increase in the price of one Will increase the demand of the other. The Cross Elasticity of Coke for Pepsi is > 0 Ec,p>0 Cross Price Elasticities Hamburgers and French Fries For Complements: An increase in the price of one will decrease the demand of the other. The Cross Elasticity of Hamburgers for French Fries is < 0 Eh,ff <0