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