AP MICROECONOMICS Mr. Lindquist Module 48 MORE ELASTICITIES AP MICROECONOMICS Mr. Lindquist Module 48

STUDENTS CAN: Measure the responsiveness of demand for one good to changes in the price of another good using the cross-price elasticity of demand Measure the responsiveness of demand to changes in income using the income elasticity of demand Explain the significance of the price elasticity of supply, which measures the responsiveness of the quantity supplied to changes in price Identify and describe the factors that influence the size of these various elasticities

Elasticity is… “HOW MUCH” Quantity will move with changes in Price.

CROSS PRICE ELASTICITY OF DEMAND between two goods measures the effect of the change in one good’s price on the quantity demanded of the other good. It is equal to the percent change in the quantity demanded of one good divided by the percent change in the other good’s price.

Cross Price Elasticity… DEALS WITH RELATED GOODS… Goods are substitutes when the cross-price elasticity of demand is positive. Goods are complements when the cross-price elasticity of demand is negative.

Income Elasticity of Demand The income elasticity of demand is the percent change in the quantity of a good demanded when a consumer’s income changes divided by the percent change in the consumer’s income.

INCOME ELASTICITY IF DEMAND When the income elasticity of demand is positive, the good is a normal good. The quantity demanded at any given price increases as income increases. When the income elasticity of demand is negative, the good is an inferior good. The quantity demanded at any given price decreases as income increases.

Supply Elasticity???? When Price Goes up….Quantity Supplied will also increase LAW OF SUPPLY BUT!!! How Much???

Measuring price Elasticity of Supply The price elasticity of supply is a measure of the responsiveness of the quantity of a good supplied to the price of that good.

Then what affects Supply Elasticity Supply Elasticity has only one variable.  PRODUCTION!!! How much time and energy is required for increasing production (output). Are Inputs Available? How long does it take me to supply more quantity???

INELASTIC SUPPLY It takes a long time to increase QUANTITY SUPPLIED. Example: “Corn” If the price of corn goes up, farmers will want to produce a lot of corn (based on the law of supply). BUT They are unable to produce a lot of corn because it takes a whole season to grow.

GRAPH INELASTIC SUPPLY Price goes up and Producers Supply about the same amount

ELASTIC SUPPLY Suppliers can INCREASE (output) Quantity Supplied very quickly and with little cost. Example: “Candy” Businesses can increase production of candy very quickly. Don’t have to do too much (hire workers, extend hours, buy more products, etc.)

GRAPH ELASTIC SUPPLY Price goes up and Producers supply WAYYY MORE!!!