4 Types of Elasticity

Elasticity Wrap-Up

3 other Types of Elasticity

• Cross-price elasticity of demand– between 2 goods

• Income Elasticity of Demand

• Elasticity of Supply– How supply changes when price changes

If Price Soda ↑ => Qty Demanded for Juice Drinks ?

If Income ↑=> Demand for normal goods?

=> Demand for inferior goods?

Cross-price elasticity of demand

• Change in quantity demanded of one good in response to a change in price of another good

• Substitutes have positive cross-price elasticity Ea,b > 0

– Example: Price soda ↑ => Qty D other drinks ↑

• Complements have negative cross-price elasticity Ea,b < 0

– Example: Price gas ↑ => Qty D large SUV’s ↓

% ∆ in Pgood A

% ∆ in Qty Dgood BCross-price elasticity of demand =

Income Elasticity of Demand

• Income elasticity of demand- how much quantity demanded responds to a change in consumers’ income

– EI = % ∆ in Qty Demanded

% ∆ in Income

• Normal Goods have positive Income elasticity (normal good = Income ↑, Qty D ↑)

• Inferior Goods: EI < 0 (negative income elasticity)

• Income elastic: EI >1 (considered a luxury)

• Income inelastic: 1 > EI > 0 (considered a necessity)

Elasticity of Supply

• Depends on 2 primary factors:

1) Ability to increase quantity produced– Beach front property is inelastic (hard to increase quantity)

– Books, cars are elastic

2) Time Period– Supply is more elastic in long run vs. short run

– Time allows companies to produce more

S1

S1

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$4

$5

100 200

------$4

--------$5-------

100

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120

Elastic: Es > 1Inelastic:

Es < 1