PowerPoint PresentationSlide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Cross-Price, Income and Supply ElasticitiesOverheadsIncome Elasticity of DemandThe income elasticity of demand is defined asthe percentage change in quantity divided bythe percentage change in income,all other influences remaining constantIncome elasticity of demand εI%ΔQD%ΔIPrice and Income Elasticities of DemandIncome elasticity measures shifts in the demand curvePrice elasticity measures movements along the curveDemand for Q6810121416182022242628303220 30 40 50 60 70 80 90 100 110 120QuantityPriceD1, I = 3000Graphical AnalysisD2, I = 4000Price Income Demand13.00 3000.00 68.7514.00 3000.00 63.7420.00 3000.00 44.2021.00 3000.00 42.03Computing price elasticity (income constant)13.00 4000.00 91.8314.00 4000.00 85.1720.00 4000.00 59.2021.00 4000.00 56.31 (Q1 Q0)(P1 P0)(P1 P0)(Q1 Q0)εD%ΔQD%ΔPPrice Elasticity of Demand (Income = 4000)Price Income Demand20.00 4000.00 59.2021.00 4000.00 56.31(56.31 59.20)(21 20)(21 20)(56.31 59.20)( 2.89)(1)(41)(115.51) 1.0257(Q1 Q0)(P1 P0)(P1 P0)(Q1 Q0)εD%ΔQD%ΔPPrice Elasticity of Demand (Income = 3000)Price Income Demand20.00 3000.00 44.2021.00 3000.00 42.03(44.20 42.03)(21 20)(21 20)(44.20 42.03 )( 2.17)(1)(41)(86.23) 1.03177 -1.0257Price Income Demand13.00 3000.00 68.7514.00 3000.00 63.7420.00 3000.00 44.2021.00 3000.00 42.0313.00 4000.00 91.8314.00 4000.00 85.1720.00 4000.00 59.2021.00 4000.00 56.31Computing income elasticity (price constant)Price Income Demand13.00 3000.00 68.7514.00 3000.00 63.7420.00 3000.00 44.2021.00 3000.00 42.0313.00 4000.00 91.8314.00 4000.00 85.1720.00 4000.00 59.2021.00 4000.00 56.31 QComputing income elasticity (price constant)Demand Data on QPrice Income Demand13.00 3000.00 68.7514.00 3000.00 63.7420.00 3000.00 44.2021.00 3000.00 42.0313.00 4000.00 91.8314.00 4000.00 85.1720.00 4000.00 59.2021.00 4000.00 56.31 Q IεI%ΔQD%ΔIIncome Elasticity of DemandPriceIncome Demand20.00 3000.00 44.2020.00 4000.00 59.20(Q1 Q0)(I1 I0)(I1 I0)(Q1 Q0)(44.2 59.20)(3,000 4,000)(3,000 4,000)(44.2 59.20)( 15)( 1000)(7,000)(103.4) 1.01547Normal and Inferior GoodsNormal goods have a positive income elasticityInferior goods have a negative income elasticityNecessities and LuxuriesNecessities typically have an income elasticitybetween 0 and 1Luxuries typically have an income elasticitygreater than 1ExamplesFresh FruitTransportation (???)PotatoesEating outCigarettesFoodMeat (Steak)Cross-price Elasticity of DemandThe cross price elasticity of demand is defined asthe percentage change in thequantity demanded of one good,all other influences remaining constantdivided by the percentage change in theprice of a different good,We denote the cross price elasticity of good i for good jas ij whereεij%ΔQDi%ΔPjWe can then rewrite this as(Q1i Q0i)(P1j P0j)(P1j P0j)(Q1i Q0i)εij%ΔQDi%ΔPjElasticities of DemandIncome elasticity measures shifts in the demand curvePrice elasticity measures movements along the curveCross-price elasticity measures shifts in the demand curveDemand for Q1810121416182022242628303220 30 40 50 60 70 80 90 100QuantityPriceD1, P2 = 10D1, P2 = 50Graphical AnalysisDemand Data for Alternative Prices of Good 2P1 P2 Income D113.00 10.00 3,000 68.7514.00 10.00 3,000 63.7413.00 50.00 3,000 72.4520.00 10.00 3,000 44.2021.00 10.00 3,000 42.0314.00 50.00 3,000 67.1720.00 50.00 3,000 46.6021.00 50.00 3,000 44.3122.00 50.00 3,000 42.24Demand Data for Alternative Prices of Good 2P1 P2 Income D113.00 10.00 3,000 68.7514.00 10.00 3,000 63.7413.00 50.00 3,000 72.4520.00 10.00 3,000 44.2021.00 10.00 3,000 42.0314.00 50.00 3,000 67.1720.00 50.00 3,000 46.6021.00 50.00 3,000 44.3122.00 50.00 3,000 42.24εD%ΔQD%ΔPPrice Elasticity of DemandPrice Income Demand20.00 3000.00 44.2021.00 3000.00 42.03(Q1 Q0)(P1 P0)(P1 P0)(Q1 Q0)(44.20 42.03)(20 21)(20 21)(44.2 42.03)(2.17)( 1)(41)(86.23) 1.03177Cross-price elasticity of demand for good 1as the price of good 2 changes from $10 to $50 εij%ΔQD1%ΔP2P1 P2 Income D120.00 10.00 3,000 44.2020.00 50.00 3,000 46.60(Q11 Q01)(P12 P02)(P12 P02)(Q11 Q01)(44.2 46.60)(10 50)(10 50)(44.2 46.60)( 2.4)( 40)(60)(90.80) .0396Substitutes and ComplementsGoods are said to be substitutes if ij > 0Goods are said to be complements if ij < 0Goods are said to be close substitutes if ij >> 0Demand goes up as other price goes upDemand goes down as other price goes upSubstitutesBeef and PorkRice Chex and Life CerealFord and Dodge CarsMargarine and ButterComplementsFood and EntertainmentCars and GasolinePrinters and Printer PaperTelevisions and VCRsBreakThe elasticity of supply is defined asthe percentage change in quantity supplieddivided by the percentage change in price, Elasticity of Supplyall other influences remaining constantεs%ΔQS%ΔP(QS1 QS0)(P1 P0)(P1 P0)(QS1 QS0)The elasticity of supplymeasures movements along the supply curveGraphical AnalysisSupply of Shirts02550751001251501752002252502753003253503754000 10 20 30 40 50 60 70 80 90 100QuantityPriceQ P0 05 2010 4015 6020 8025 10030 12035 14040 16045 18050 20055 22060 240Supply Dataεs%ΔQS%ΔP(QS1 QS0)(P1 P0)(P1 P0)(QS1 QS0)(25 20)(100 80)(100 80)(25 20)(5)(20)(180)(45)14411441Another Example of Elasticity of SupplyQ P50 20055 220εs%ΔQS%ΔP(QS1 QS0)(P1 P0)(P1 P0)(QS1 QS0)(50 55)(200 220)(200 220)(50 55)(5)(20)(420)(105)Factors affecting the elasticity of supplySupply will be more elastic, the more alternatives producers of it have for production.Supply will be more elastic if the marketis 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 productionClassification of the elasticity of supplyInelastic supplyWhen the numerical value of the elasticity of supply is between 0 and 1.0, we say that supply is inelastic. %ΔQS%ΔP< 1%ΔQS<
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