4 Types of Elasticity Elasticity Wrap-Up

4 Types of Elasticity Price Elasticity of Demand =Ed Cross Price Elasticity Income Elasticity Price Elasticity of Supply

Cross-price elasticity of demand How quantity demanded of one good responds 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 B Cross-price Ea,b =

Income Elasticity of Demand Income elasticity of demand- how 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: How quantity supplied changes when price changes Elastic: Es > 1 Inelastic: Es < 1 Determinants of Elasticity of Supply: Ability to increase quantity produced Beach front property is inelastic (hard to increase quantity) Books, cars are elastic Time Period Supply is more elastic in long run vs. short run Time allows companies to produce more

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