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 E a,b > 0 –Example: Price soda ↑ => Qty D other drinks ↑ Complements have negative cross-price elasticity E a,b < 0 –Example: Price gas ↑ => Qty D large SUV’s ↓ % ∆ in P good A % ∆ in Qty D good B Cross-price elasticity of demand =

Income Elasticity of Demand Income elasticity of demand- how much quantity demanded responds to a change in consumers’ income – E I = % ∆ in Qty Demanded % ∆ in Income Normal Goods have positive Income elasticity (normal good = Income ↑, Qty D ↑) Inferior Goods: E I < 0 (negative income elasticity) Income elastic: E I >1 (considered a luxury) Income inelastic: 1 > E I > 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 Elastic: E s > 1 Inelastic: E s < 1