© 2012 McGraw-Hill Ryerson Limited CHAPTER 4 Elasticity LO4: Use real-world examples to demonstrate that the concept of elasticity is a powerful tool LO5: Understand the meaning and significance of elasticity of supply, income elasticity, and cross-elasticity of demand © 2012 McGraw-Hill Ryerson Limited

© 2012 McGraw-Hill Ryerson Limited LO5 Elasticity of Supply a measure of how much quantity supplied changes as a result of a change in price can be expanded to: © 2012 McGraw-Hill Ryerson Limited

© 2012 McGraw-Hill Ryerson Limited LO5 Elasticity of Supply Example: When price changes from $2 to $3, the quantity supplied rises from 400 to 500. © 2012 McGraw-Hill Ryerson Limited

© 2012 McGraw-Hill Ryerson Limited LO5 © 2012 McGraw-Hill Ryerson Limited

Perfectly Inelastic Supply LO5 Perfectly Inelastic Supply © 2012 McGraw-Hill Ryerson Limited

© 2012 McGraw-Hill Ryerson Limited LO5 Income Elasticity the responsiveness of quantity demanded to a change in income can be expanded to: © 2012 McGraw-Hill Ryerson Limited

Income Elasticity If coefficient is: Type of Good: Demand is: LO5 Income Elasticity If coefficient is: Type of Good: Demand is: Greater than 1 Normal – Luxury good Income elastic Less than 1 but greater than 0 Normal – Necessity Income inelastic Less than 0 Inferior good Negative income elasticity © 2012 McGraw-Hill Ryerson Limited

LO5 Income Elasticity TABLE 4.9 Differences in Spending between the Richest and Poorest Groups in Canada, 1996 Income Inelastic Income Elastic Category Lowest income percentile Highest income percentile Lowest income percentile Food 20.1% 15.9% Furniture 2.7% 4.3% Shelter 34.6 21.9 Clothing 4.4 7.3 Public Private transport 2.0 1.7 9.6 17.6 Household Recreation 4.9 9.1 operation 7.2 6.6 Education 1.3 2.2 Tobacco & alcohol 3.9 2.8 Source: Based on Statistics Canada, Family Expenditure in Canada, 1996, catalogue no. 62-555-XPB, released on July 28, 1998. © 2012 McGraw-Hill Ryerson Limited

© 2012 McGraw-Hill Ryerson Limited LO5 Self-Test You are given the following data. Assume that the prices of X and Y do not change:   a) Calculate the income elasticity for products X and Y. b) Are products X and Y normal goods? Income Quantity Demanded of X Quantity Demanded of Y $10 000 200 50 15 000 350 54 © 2012 McGraw-Hill Ryerson Limited

© 2012 McGraw-Hill Ryerson Limited LO5 Self-Test You are given the following data. Assume that the prices of X and Y do not change:   a) Calculate the income elasticity for products X and Y. Income Quantity Demanded of X Quantity Demanded of Y $10 000 200 50 15 000 350 54 © 2012 McGraw-Hill Ryerson Limited

© 2012 McGraw-Hill Ryerson Limited LO5 Self-Test You are given the following data. Assume that the prices of X and Y do not change:   b) Are products X and Y normal goods? Income Quantity Demanded of X Quantity Demanded of Y $10 000 200 50 15 000 350 54 © 2012 McGraw-Hill Ryerson Limited

© 2012 McGraw-Hill Ryerson Limited LO5 Cross Elasticity responsiveness of the change in Qd of product A to a change in the price of product B can be expanded to: © 2012 McGraw-Hill Ryerson Limited

Quantity Demanded per Week (lb.) LO5 Cross Elasticity Margarine Butter Price Quantity Demanded per Week (lb.) $1.50 5000 $3.00 1000 2.10 3200 3.00 2000 © 2012 McGraw-Hill Ryerson Limited

© 2012 McGraw-Hill Ryerson Limited LO5 Cross Elasticity If coefficient is: Goods are: Positive Substitutes Negative Complements © 2012 McGraw-Hill Ryerson Limited

© 2012 McGraw-Hill Ryerson Limited LO5 © 2012 McGraw-Hill Ryerson Limited