other elasticities lesson 3.48. cross-price elasticity of demand the demand for a good is often...

Other Elasticities

Lesson 3.48

Cross-Price Elasticity of Demand

• The Demand for a good is often affected by the demand for other products, such as substitutes and complimentary items.– Substitute goods will have a positive cross-price elasticity (Price of B

goes up, Demand for A goes up)– Complimentary goods will have a negative cross-price elasticity (Price

of B goes up, Demand for A goes down)

• Cross-Price Elasticity =– %Change in Demand A/%Change in Price B

Income Elasticity of Demand• How changes in Income affect the demand for a good.

– When the Income elasticity is positive, and the good is a normal good, quantity demanded will increase as income increases.

– When Income Elasticity is negative, demand decreases for inferior goods as income increases.

• Income-Elastic– Demand will grow faster than income

• Income-Inelastic– Demand will grow, but slower that income

• %Change in Quantity Demanded/%Change in Income

Price Elasticity of Supply

• The price-elasticity of supply is defined the same as with demand.– Price Elasticity of Supply = %Change in quantity supplied/%Change in

price– Perfectly elastic and perfectly inelastic extremes

• What factors determine price elasticity of supply?– Availability of inputs– Time