OTHER ELASTICITIES Microeconomics Made Easy by William Yacovissi Mansfield University © William Yacovissi All Rights Reserved

INCOME ELASTICITY l For big ticket items, quantity demanded may change significantly with income l Logically the quantity demanded of a good increases with income. This is called a normal good. l For other goods, the quantity demanded may decline with income. These are inferior goods.

CROSS PRICE ELASTICITY l It may also be useful to have an understanding of how the quantity demanded of your product changes with the price of other products. l Many products have other closely related products that are important in their market demand. For examples tea and coffee

CROSS PRICE ELASTICITY l For example you are in the tea business and a frost kills the coffee crops in Brazil. Is this of any importance to you in the tea business l Logically, the decrease in the supply of coffee will increase the price of coffee and reduce the quantity of coffee.

CROSS PRICE ELASTICITY l Since coffee and tea are substitutes this means the demand for tea will increase. l If you are in the tea business you need estimates of how much the price and quantity of tea will go up and what this will do to your firm’s profitability.

CROSS PRICE ELASTICITY l Also, if you are going to meet this increased demand for tea, you need to get tea production cranked up. Harvesting, shipping, packaging, etc. l Other goods are complements, that is they are used together. Hot dogs and hot dog rolls is the quintessential example. Notice they make you buy two useless hot dog rolls every time you want hot dogs.