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2. KRUGMAN’S
Economics
for AP®
S E C O N D E D I T I O N

3. Section 9
Module 48

4. What You Will Learn in this Module
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
Section 9 | Module 48

5. The Cross-Price Elasticity of Demand
The 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.
Section 9 | Module 48

6. The Cross-Price Elasticity of Demand
Goods are substitutes when the cross-price elasticity of demand is positive.
Goods are complements when the cross-price elasticity of demand is negative.
Section 9 | Module 48

7. The 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.
Section 9 | Module 48

8. The Income Elasticity of 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.
Section 9 | Module 48

9. F Y I
Where have all the farmers gone?
The income elasticity of demand for food is much less than 1 so it is income inelastic.
Competition among farmers means that technological progress leads to lower food prices.
Meanwhile, the demand for food is price-inelastic, so falling prices of agricultural goods, other things equal, reduce the total revenue of farmers.
Progress in farming has been good for consumers but bad for farmers.
Section 9 | Module 48

10. Measuring the 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.
It is the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve.
Section 9 | Module 48

11. Two Extreme Cases of Price Elasticity of Supply
Figure Caption:
Figure 12.1:
Panel (a) shows a perfectly inelastic supply curve, which is a vertical line. The price elasticity of supply is zero: the quantity supplied is always the same, regardless of price. Panel (b) shows a perfectly elastic supply curve, which is a horizontal line. At a price of $12, producers
will supply any quantity, but they will supply none at a price below $12. If price rises above $12, they will supply an extremely large quantity.
Section 9 | Module 48

12. The Price Elasticity of Supply
There is perfectly inelastic supply when the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied.
A perfectly inelastic supply curve is a vertical line.
There is perfectly elastic supply when even a tiny increase or reduction in the price will lead to very large changes in the quantity supplied, so that the price elasticity of supply is infinite.
A perfectly elastic supply curve is a horizontal line.
Section 9 | Module 48

13. What Factors Determine the Price Elasticity of Supply?
The Availability of Inputs: The price elasticity of supply tends to be large when inputs are readily available and can be shifted into and out of production at a relatively low cost. It tends to be small when inputs are difficult to obtain.
Time: The price elasticity of supply tends to grow larger as producers have more time to respond to a price change. This means that the long-run price elasticity of supply is often higher than the short-run elasticity.
Section 9 | Module 48

14. An Elasticity Menagerie

15. An Elasticity Menagerie
Section 9 | Module 48

16. Summary
The cross-price elasticity of demand measures the effect of a change in one good’s price on the quantity of another good demanded.
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 income.
If the income elasticity is greater than 1, a good is income elastic; if it is positive and less than 1, the good is income-inelastic.
The price elasticity of supply is the percent change in the quantity of a good supplied divided by the percent change in the price.
Section 9 | Module 48

17. Summary
If the quantity supplied does not change at all, we have an instance of perfectly inelastic supply; the supply curve is a vertical line.
If the quantity supplied is zero below some price but infinite above that price, we have an instance of perfectly elastic supply; the supply curve is a horizontal line.
The price elasticity of supply depends on the availability of resources to expand production and on time. It is higher when inputs are available at relatively low cost and the longer the time elapsed since the price change.
Section 9 | Module 48