1. © 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
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LO5
Elasticity of Supply
a measure of how much quantity supplied changes as a result of a change in price
can be expanded to:
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LO5
Elasticity of Supply
Example: When price changes from $2 to $3, the quantity supplied rises from 400 to 500.
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LO5
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5. Perfectly Inelastic Supply
LO5
Perfectly Inelastic Supply
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LO5
Income Elasticity
the responsiveness of quantity demanded to a change in income
can be expanded to:
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7. 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
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8. 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 XPB, released on July 28, 1998.
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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
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10. © 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
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11. © 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
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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:
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13. 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
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14. © 2012 McGraw-Hill Ryerson Limited
LO5
Cross Elasticity
If coefficient is:
Goods are:
Positive
Substitutes
Negative
Complements
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15. © 2012 McGraw-Hill Ryerson Limited
LO5
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