1. Cross-Price, Income and Supply Elasticities Overheads

2. Income Elasticity of Demand The income elasticity of demand is defined as the percentage change in quantity divided by the percentage change in income, all other influences remaining constant

3. Price and Income Elasticities of Demand Income elasticity measures shifts in the demand curve Price elasticity measures movements along the curve

4. Demand for Q 6 8 10 12 14 16 18 20 22 24 26 28 30 32 2030405060708090100110120 Quantity Price D1, I = 3000 Graphical Analysis D2, I = 4000

5. PriceIncomeDemand 13.003000.0068.75 14.003000.0063.74 20.003000.0044.20 21.003000.0042.03 Computing price elasticity (income constant) 13.004000.0091.83 14.004000.0085.17 20.004000.0059.20 21.004000.0056.31  

6. Price Elasticity of Demand (Income = 4000) PriceIncomeDemand 20.004000.0059.20 21.004000.0056.31

7. Price Elasticity of Demand (Income = 3000) PriceIncomeDemand 20.003000.0044.20 21.003000.0042.03  -1.0257

8. PriceIncomeDemand 13.003000.0068.75 14.003000.0063.74 20.003000.0044.20 21.003000.0042.03 13.004000.0091.83 14.004000.0085.17 20.004000.0059.20 21.004000.0056.31 Computing income elasticity (price constant)

9. PriceIncomeDemand 13.003000.0068.75 14.003000.0063.74 20.003000.0044.20 21.003000.0042.03 13.004000.0091.83 14.004000.0085.17 20.004000.0059.20 21.004000.0056.31  Q Computing income elasticity (price constant)

10. Demand Data on Q PriceIncomeDemand 13.003000.0068.75 14.003000.0063.74 20.003000.0044.20 21.003000.0042.03 13.004000.0091.83 14.004000.0085.17 20.004000.0059.20 21.004000.0056.31  Q  I

11. Income Elasticity of Demand PriceIncomeDemand 20.003000.0044.20 20.004000.0059.20

12. Normal and Inferior Goods Normal goods have a positive income elasticity Inferior goods have a negative income elasticity

13. Necessities and Luxuries Necessities typically have an income elasticity between 0 and 1 Luxuries typically have an income elasticity greater than 1

14. Examples Fresh Fruit Transportation (???) Potatoes Eating out Cigarettes Food Meat(Steak)

15. Cross-price Elasticity of Demand The cross price elasticity of demand is defined as the percentage change in the quantity demanded of one good, all other influences remaining constant divided by the percentage change in the price of a different good, We denote the cross price elasticity of good i for good j as  ij where

16. We can then rewrite this as

17. Elasticities of Demand Income elasticity measures shifts in the demand curve Price elasticity measures movements along the curve Cross-price elasticity measures shifts in the demand curve

18. Demand for Q1 8 10 12 14 16 18 20 22 24 26 28 30 32 2030405060708090100 Quantity Price D1, P2 = 10 D1, P2 = 50 Graphical Analysis

19. Demand Data for Alternative Prices of Good 2 P1P2IncomeD1 13.0010.003,00068.75 14.0010.003,00063.74 13.0050.003,00072.45 20.0010.003,00044.20 21.0010.003,00042.03 14.0050.003,00067.17 20.0050.003,00046.60 21.0050.003,00044.31 22.0050.003,00042.24

20. Demand Data for Alternative Prices of Good 2 P1P2IncomeD1 13.0010.003,00068.75 14.0010.003,00063.74 13.0050.003,00072.45 20.0010.003,00044.20 21.0010.003,00042.03 14.0050.003,00067.17 20.0050.003,00046.60 21.0050.003,00044.31 22.0050.003,00042.24

21. Price Elasticity of Demand PriceIncomeDemand 20.003000.0044.20 21.003000.0042.03

22. Cross-price elasticity of demand for good 1 as the price of good 2 changes from $10 to $50 P1P2IncomeD1 20.0010.003,00044.20 20.0050.003,00046.60

23. Substitutes and Complements Goods are said to be substitutes if  ij > 0 Goods are said to be complements if  ij < 0 Goods are said to be close substitutes if  ij >> 0 Demand goes up as other price goes up Demand goes down as other price goes up

24. Substitutes Beef and Pork Rice Chex and Life Cereal Ford and Dodge Cars Margarine and Butter

25. Complements Food and Entertainment Cars and Gasoline Printers and Printer Paper Televisions and VCRs

26. Break

27. The elasticity of supply is defined as the percentage change in quantity supplied divided by the percentage change in price, Elasticity of Supply all other influences remaining constant

28. The elasticity of supply measures movements along the supply curve

29. Graphical Analysis Supply of Shirts 0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 0102030405060708090100 Quantity Price

30. QP0 520 1040 1560 2080 25100 30120 35140 40160 45180 50200 55220 60240 Supply Data

31. Another Example of Elasticity of Supply QP 50200 55220

32. Factors affecting the elasticity of supply Supply will be more elastic, the more alternatives producers of it have for production. Supply will be more elastic if the market is defined narrowly. Supply will be much more elastic in the long run. Supply will be more inelastic if there are biological or other lags in production

33. Classification of the elasticity of supply Inelastic supply When the numerical value of the elasticity of supply is between 0 and 1.0, we say that supply is inelastic.

34. Elastic supply When the numerical value of the elasticity of supply is greater than 1.0, we say that supply is elastic. Classification of the elasticity of supply

35. Unitary elastic supply When the numerical value of the elasticity of supply is equal to 1.0, we say that supply is unitary elastic. Classification of the elasticity of supply

36. Perfectly elastic -  S =  Perfectly inelastic -  S = 0 horizontal vertical Very short run response

37. Demand for food and food products is generally price inelastic Supply of many crops is stochastic due to weather, disease, etc Thus we tend to see large changes in price and thus net farm income Analysis of an agricultural market

39. End of Presentation