CHAPTER 2 • The Basics of Supply and Demand 35

Price Price D

P* D

Quantity Q* Quantity
(a) (b)

F IGURE 2.12
(a) INFINITELY ELASTIC DEMAND (b) COMPLETELY INELASTIC DEMAND
(a) For a horizontal demand curve, !Q/!P is infinite. Because a tiny change in price leads to an enormous change
in demand, the elasticity of demand is infinite. (b) For a vertical demand curve, !Q/!P is zero. Because the quantity
demanded is the same no matter what the price, the elasticity of demand is zero.

demand is the percentage change in the quantity demanded, Q, resulting from a • income elasticity of demand
1-percent increase in income I: Percentage change in the quantity
demanded resulting from a
1-percent increase in income.
!Q/Q I !Q
EI = = (2.2)
!I/I Q !I

The demand for some goods is also affected by the prices of other goods. For
example, because butter and margarine can easily be substituted for each other,
the demand for each depends on the price of the other. A cross-price elasticity • cross-price elasticity of
of demand refers to the percentage change in the quantity demanded for a good demand Percentage change in
the quantity demanded of one
that results from a 1-percent increase in the price of another good. So the elasticity good resulting from a 1-percent
of demand for butter with respect to the price of margarine would be written as increase in the price of another.

!Qb/Qb Pm !Qb
EQbPm = = (2.3)
!Pm/Pm Qb !Pm

where Qb is the quantity of butter and Pm is the price of margarine.

In this example, the cross-price elasticities will be positive because the
goods are substitutes: Because they compete in the market, a rise in the price
of margarine, which makes butter cheaper relative to margarine, leads to an
increase in the quantity of butter demanded. (Because the demand curve for
butter will shift to the right, the price of butter will rise.) But this is not always
the case. Some goods are complements: Because they tend to be used together, an
increase in the price of one tends to push down the consumption of the other.
Take gasoline and motor oil. If the price of gasoline goes up, the quantity of