1. Elasticities (continued)
AP Microeconomics
Unit 2, Day 2
Rixie

2. Review: Price elasticity of demand
Measures consumer sensitivity to a change in price

3. Determinants of Price Elasticity of Demand
Substitutability
The larger the number of substitute goods that are available, the greater the price elasticity of demand.
Ex: Nike shoes vs. Beyoncé concert tickets

4. Determinants of Price Elasticity of Demand
2. Proportion of Income
The higher the price of a good relative to consumers’ incomes, the greater the price elasticity of demand.
Ex: A car vs. a pack of gum

5. Determinants of Price Elasticity of Demand
3. Luxuries versus Necessities
The more that a good is considered to be a “luxury” rather than a “necessity,” the greater is the price elasticity of demand.
Ex: Jewelry vs. bread

6. Determinants of Price Elasticity of Demand
4. Time
The longer the time period, the more elastic is product demand.
Ex: Rising gas prices and the switch to hybrid cars

7. Cross elasticity of demand
Measures how sensitive consumer purchases of one product (X) are to a change in price of another product (Y)

8. If cross elasticity of demand is:
Positive: X & Y are substitutes
Sales of X move in the same direction as a change in price of Y
Ex: Coke & Pepsi
Negative: X & Y are complements
An increase in price of one good decreases the demand for the other.
Ex: Cameras and film
Near-zero: X & Y are independent
The goods are unrelated and the price change of one has no effect on the purchase of the other

9. Income elasticity of demand
Measures the degree to which consumers respond to a change in their incomes by buying more or less of a good

10. If Income elasticity of demand is:
Positive: normal (or superior) goods
Quantity demanded of the product changes in the same direction as change in income
Ex: Televisions, cars, new name-brand clothing
Negative: inferior goods
Quantity demanded of the product changes in the opposite direction from change in income
Ex: Used clothing, Ramen noodles, bus tickets

11. Price elasticity of Supply
Measures producer sensitivity to a change in price

12. How elastic is supply? (use same ranges as elasticity of demand)
Supply is Elastic
Es = 1
Supply is Unit Elastic
Es < 1
Supply is Inelastic

13. Producers being able to modify supply is highly dependent on the time available…
Market Period: Occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied
Supply curve could be perfectly inelastic (vertical), because quantity supplied cannot change
Regardless of a change in demand or a change in price, the quantity supplied remains constant.
Ex: tomato farmer brings a truckload of tomatoes to market (the entire season’s output)

14. Short run
Short Run: Too short a time period to change plant capacity, but long enough to use more labor and/or resources to increase quantity supplied
Supply is somewhat more elastic
Can change quantity supplied (within limits) as response to a predicted increase in demand
Ex: tomato farmer could predict change in demand and increase labor, fertilizer, and pesticides

15. Long run
Long Run: A time period long enough for firms to adjust their plant sizes and for firms to enter or leave the industry
Supply is very elastic.
Time to acquire larger facilities, buy land, buy more or better machinery
Can greatly increase quantity supplied
Ex: Tomato farmer can buy more land, machinery, equipment, and therefore employ more workers

16. Graphical representations

17. Classwork to practice
If you were absent last class (2/25), you need to complete questions 2, 4 & 5 (p ).
Today, work on study questions 6, 7,12, 13, 14.