1. Mr. Bernstein Module 48: Other Elasticities October 2017
AP Economics
Mr. Bernstein
Module 48:
Other Elasticities
October 2017

2. AP Economics Mr. Bernstein
Elasticity can measure responsiveness of other consumer and producer activities
Cross-price elasticity of demand
Income elasticity of demand
Price elasticity of supply

3. AP Economics Mr. Bernstein
Who is interested in these elasticities?
Economists
Governments
Firms
Example of cross-price elasticity: How do changes in the price of gas affect car sales? GM and Ford care.
Example of income elasticity: In a recession, how do declining incomes affect hotel occupancy? Holiday Inn and Priceline care.

4. AP Economics Mr. Bernstein
Cross-Price Elasticity of Demand
Measures the responsiveness of the demand for good “X” to changes in the price of good “Y”
Aka %rQDx / %rPy
Quantity of good “X” demanded due to a change in Py
Substitutes have positive cross-elasticity
A 2% rise in the price of Nikes causes a 4% increase in quantity demanded for Adidas; EAdidas, Nikes = 4% / 2% = 2
Compliments have negative cross-elasticity
A 20% rise in the price of gasoline causes a 5% fall in the quantity of SUVs demanded; E SUVs, gasoline = 20% / -5% = -4
Independent products have zero cross-elasticity
A 10% rise in the price of peanut butter has no effect on demand for SUVs

5. AP Economics Mr. Bernstein
Income Elasticity of Demand
Measures the responsiveness of demand for a good to changes in income
Aka %r QDx / %rI
Quantity demanded shifts due to change in income; elasticity measures the responsiveness or how much QDx changes
Normal goods have positive income elasticity
American income declines 2% and purchases of airline tickets to Italy decline 8%; Ei= 8% / 2% = 4 (a high income elasticity typical of luxury items)
American income increases 4% and purchases of fresh vegetables increase 1%; Ei = 1% / 4% = .25 (an income-inelastic response typical of necessity items)

6. AP Economics Mr. Bernstein
Income Elasticity of Demand, cont.
Inferior goods have negative income elasticity
American income declines 5% and purchases of SPAM increase 4%; Ei= 4% / -5% = -.8

7. AP Economics Mr. Bernstein
Price Elasticity of Supply
Law of Supply: When price increases, firms increase quantity supplied
Price Elasticity of Supply follows same formula as Price Elasticity of Demand: Es = %rQs / %rP
Elastic and Inelastic definitions are the same also:
If Es >1, supply is considered elastic
If Es <1, supply is considered inelastic
If Es = 1, supply is considered unit elastic
Elastic is flatter and perfectly elastic is horizontal
Inelastic is steeper and perfectly inelastic is vertical

8. AP Economics Mr. Bernstein
Price Elasticity of Supply
What might cause a perfectly inelastic supply curve?
Even at absurdly high prices, firms will not increase supply
Limits to production, perhaps due to technology limits, resource constraints or in the case of farming, seasonal impossibilities

9. AP Economics Mr. Bernstein
Factors Influencing Elasticity of Supply
Availability of inputs
Example: If coal shipments only arrive monthly, a factory cannot quickly increase production when prices increase
Time
“Market period” is so short that supply is perfectly inelastic
Short-run elasticity of supply is greater than zero
Long-run elasticity of supply is greater than short-run elasticity
Example: Farmers cannot react to rising soybean prices until the next growing season.