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Other Elasticity Concepts How much of a shift?

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Other Elasticity Concepts Other elasticities can be useful in specifying the effects of a shift factor of demand: –Income elasticity of demand. –Cross-price elasticity of demand.

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Income Elasticity of Demand Income elasticity of demand – the percentage change in demand divided by the percentage change in income.

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Income Elasticity of Demand Income elasticity of demand tells us the responsiveness of demand to changes in income.

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Income Elasticity of Demand An increase in income generally increases ones consumption of almost all goods. The increase may be greater for some goods than for others.

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Income Elasticity of Demand Normal goods are those whose consumption increases with an increase in income. They have income elasticities greater than zero.

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Income Elasticity of Demand Normal goods are divided into luxuries and necessities.

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Income Elasticity of Demand Luxuries are goods that have an income elasticity greater than one. Their percentage increase in demand is greater than the percentage increase in income.

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Income Elasticity of Demand A necessity has an income elasticity less than 1. The consumption of a necessity rises by a smaller proportion than the rise in income.

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Income Elasticity of Demand Inferior goods are those whose consumption decreases when income increases. Inferior goods have income elasticities less than zero.

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Income Elasticities of Selected Goods Hard liquor2.50 Private university tuition1.10

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Other Demand Elasticities Income Elasticity of Demand: the percentage change in the quantity demanded divided by the percentage change in income. –Normal goods: goods for which the income elasticity of demand is positive. –Inferior goods: Goods for which the income elasticity of demand is negative.

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Necessities and Luxuries Goods with lower income elasticities are often called necessities, since the quantities demanded dont vary much with income. –Typical income elasticities are 0.4 or 0.5. Goods with higher income elasticities are often called luxuries, since people give them up readily when their incomes fall. –Typical elasticities are 1.5 to 2.0.

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Cross-Price Elasticity of Demand Cross-price elasticity of demand – the percentage change in demand divided by the percentage change in the price of another good.

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Cross-Price Elasticity of Demand Cross-price elasticity of demand tells us the responsiveness of demand to changes in prices of other goods.

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Complements and Substitutes Substitutes are goods that can be used in place of another. Substitutes have positive cross-price elasticities.

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Complements and Substitutes Complements are goods that are used in conjunction with other goods. Complements have negative cross-price elasticities.

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Cross-Price Elasticities Commodities Cross-Price Elasticity Beef in response to price change in pork0.11 Beef in response to price change in chicken0.02 U.S. cars in response to price changes in European and Asian automobiles 0.28 European automobiles in response to price changes in U.S. and Asian automobiles 0.61 Beer in response to changes in wine0.23 Hard liquor in response to price changes in beer - 0.11

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Calculating Income Elasticity P0P0 D0D0 D1D1 P0P0 20Quantity26 Shift due to 20% rise in income

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Calculating Cross-Price Elasticity D0D0 P0P0 D1D1 P0P0 104 Quantity of Beef 108 Shift due to 33% rise in price of pork

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Elasticity and Shifting Supply and Demand The more elastic the demand (supply), the greater the effect of a supply (demand) shift on quantity, and the smaller the effect on price.

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Effects of Shifts in Supply on Price and Quantity P0P0 P1P1 D Price Quantity S0S0 S1S1 Q0Q0 Q1Q1 P0P0 P1P1 D Price Quantity S0S0 S1S1 Q0Q0 Q1Q1 Inelastic DemandElastic Demand

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Elasticity If a seller needs to reduce the price of a product, how much should it be reduced? Reduce too little, and projected increase in sales will not.

Elasticity If a seller needs to reduce the price of a product, how much should it be reduced? Reduce too little, and projected increase in sales will not.

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