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2. KRUGMAN’S
Economics
for AP®
S E C O N D E D I T I O N

3. Section 9
Module 46

4. What You Will Learn in this Module
Explain the law of demand on the basis of income and substitution effects
Calculate the price elasticity of demand, a measure of consumer responsiveness to price changes
Section 9 | Module 46

5. Explaining the Law of Demand
The substitution effect of a change in the price of a good is the change in the quantity consumed of that good as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive.
Example: If a consumer values Coke and Pepsi equally and the price of Coke increases DEMAND for Pepsi will increase because of the substitution effect.
Section 9 | Module 46

6. Explaining the Law of Demand
The income effect of a change in the price of a good is the change in the quantity consumed of that good that results from a change in the consumer’s purchasing power due to the change in the price of the good.
Example: If consumers prefer lobster over chicken and consumer incomes increase the demand for lobster will increase.
Section 9 | Module 46

7. F Y I
Giffen Goods
Some observers claimed that Ireland’s demand curve for potatoes sloped upward, not downward.
Suppose that there is a good that absorbs a large share of consumers’ budgets and that this good is also inferior—people demand less of it when their income rises.
Suppose the price of the good, say potatoes, increases. This would, other things equal, cause people to substitute other goods for potatoes.
But other things are not equal: given the higher price of potatoes, people are poorer. This increases the demand for potatoes because potatoes are an inferior good.
Section 9 | Module 46

8. Defining and Measuring Elasticity
Economists use the concept of elasticity to measure the responsiveness of one variable to changes in another.
The price elasticity of demand is the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve (dropping the minus sign).
Section 9 | Module 46

9. Calculating the Price Elasticity of Demand
Section 9 | Module 46

10. Demand for Vaccinations
Section 9 | Module 46

11. Calculating the Price Elasticity of Demand
Section 9 | Module 46

12. Using the Midpoint Method
The midpoint method is a technique for calculating the percent change.
In this approach, we calculate changes in a variable compared with the average, or midpoint, of the starting and final values.
Section 9 | Module 46

13. The Midpoint Method
Section 9 | Module 46

14. The Midpoint Method
Section 9 | Module 46

15. F Y I
Estimating Elasticities
Section 9 | Module 46

16. Summary
Elasticity is a general measure of responsiveness that can be used to answer such questions.
The price elasticity of demand—the percent change in the quantity demanded divided by the percent change in the price (dropping the minus sign)—is a measure of the responsiveness of the quantity demanded to changes in the price.
Section 9 | Module 46