Elasticities (continued) AP Microeconomics Unit 2, Day 2 Rixie

Review: Price elasticity of demand Measures consumer sensitivity to a change in price

Determinants of Price Elasticity of Demand Substitutability The larger the number of substitute goods that are available, the greater the price elasticity of demand. Ex: Nike shoes vs. Beyoncé concert tickets

Determinants of Price Elasticity of Demand 2. Proportion of Income The higher the price of a good relative to consumers’ incomes, the greater the price elasticity of demand. Ex: A car vs. a pack of gum

Determinants of Price Elasticity of Demand 3. Luxuries versus Necessities The more that a good is considered to be a “luxury” rather than a “necessity,” the greater is the price elasticity of demand. Ex: Jewelry vs. bread

Determinants of Price Elasticity of Demand 4. Time The longer the time period, the more elastic is product demand. Ex: Rising gas prices and the switch to hybrid cars

Cross elasticity of demand Measures how sensitive consumer purchases of one product (X) are to a change in price of another product (Y)

If cross elasticity of demand is: Positive: X & Y are substitutes Sales of X move in the same direction as a change in price of Y Ex: Coke & Pepsi Negative: X & Y are complements An increase in price of one good decreases the demand for the other. Ex: Cameras and film Near-zero: X & Y are independent The goods are unrelated and the price change of one has no effect on the purchase of the other

Income elasticity of demand Measures the degree to which consumers respond to a change in their incomes by buying more or less of a good

If Income elasticity of demand is: Positive: normal (or superior) goods Quantity demanded of the product changes in the same direction as change in income Ex: Televisions, cars, new name-brand clothing Negative: inferior goods Quantity demanded of the product changes in the opposite direction from change in income Ex: Used clothing, Ramen noodles, bus tickets

Price elasticity of Supply Measures producer sensitivity to a change in price

How elastic is supply? (use same ranges as elasticity of demand) Supply is Elastic Es = 1 Supply is Unit Elastic Es < 1 Supply is Inelastic

Producers being able to modify supply is highly dependent on the time available… Market Period: Occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied Supply curve could be perfectly inelastic (vertical), because quantity supplied cannot change Regardless of a change in demand or a change in price, the quantity supplied remains constant. Ex: tomato farmer brings a truckload of tomatoes to market (the entire season’s output)

Short run Short Run: Too short a time period to change plant capacity, but long enough to use more labor and/or resources to increase quantity supplied Supply is somewhat more elastic Can change quantity supplied (within limits) as response to a predicted increase in demand Ex: tomato farmer could predict change in demand and increase labor, fertilizer, and pesticides

Long run Long Run: A time period long enough for firms to adjust their plant sizes and for firms to enter or leave the industry Supply is very elastic. Time to acquire larger facilities, buy land, buy more or better machinery Can greatly increase quantity supplied Ex: Tomato farmer can buy more land, machinery, equipment, and therefore employ more workers

Graphical representations

Classwork to practice If you were absent last class (2/25), you need to complete questions 2, 4 & 5 (p. 370 - 371). Today, work on study questions 6, 7,12, 13, 14.