Independent Goods

A zero or near zero cross elasticity suggests that the two

products are unrelated or INDEPENDENT GOODS.

Formula for the

coefficient of cross
Exy = Percentage change in quantity demanded of product X elasticity of demand
Divided by
Percentage change in quantity demanded of product Y Cross Elasticity allows us to
quantify and more fully
understand substitute and If cross elasticity of demand is positive, meaning that sales X moves in the
complementary goods. Substitute Goods same direction as a change in the price of Y, then X & Y are SUBSTITUTE
GOODS.
Application of Cross The larger the cross elasticity, the greater the substitutability between the
Substitutability
Determinants of Price Elasticity Elasticity of Demand products
An increase or decrease in price Proportion of income Should a company change a price?
leaves total revenue unchanged Luxuries versus necessities Should the Government allow a merger?
Time
When cross elasticity is negative, we know that X and Y go
together, meaning they are COMPLEMENTARY GOODS.
The larger the negative cross elasticity coefficient, the greater in
Complementary Goods complementary between the two goods.

Unit Elasticity
Length of time over which producers
are unable to respond to a change in
If demand is elastic, a price with a change in quantity
decrease in price increase supplied
total revenue and an increase
in price, decreases total
revenue. Immediate Market Period
Price and total revenue move
Measures the sensitivity of consumer purchases of one
in opposite directions
Elastic Demand Formula : Total Revenue = Price X Quantity The Total - Revenue Test Cross Elasticity of Demand product X to a change in price of some other product Y

The period of time is too short to change plant capacity but long
enough to use the fixed-sized plant more intensively or less

Supply and Time

Short Run intensively.

Inelastic Demand Using Averages
If demand is inelastic, a price Using Percentages
decrease reduces total revenue and a Elimination of the
price increase, increases total
revenue.
Minus Sign
Price and total revenue are moving in
The time period is long enough for firms to
the same direction
Long Run adjust their plant sizes and for new firms to
Elastic Demand enter (or existing firms to leave) the industry.
Sensitive to price changes
The Price Large change in quantity demanded
Ed= percentage change in quantity of
product X Divided by Elasticity of The Price Elasticity of
Demand Formula Measures buyers responsiveness to price changes Price Elasticity of Demand Price Elasticity of Supply Measures sellers responsiveness to price changes Supply formula Es= percentage change in quantity supplied of product X
Percentage change in Price of X
Price Elasticity Divided by
Percentage change in Price of Product X

Insensitive to Price Change

Small change in quantity demanded
The Midpoint Formula Inelastic demand
Ed = [Change in quantity/(sum of quantity/2)]
Divided by
[Change in Price/(Sum of prices/2)]

The Coefficient of
Additionally
income Elasticity of Perfectly Inelastic Es = 0
Elastic Demand Ed > 1 Demand Formula Ei = Percentage change in quantity demanded
divided by
Percentage change in income Elastic Supply Es > 1
Interpretations the price elasticity of supply
Unit Elastic Ed = 1 Unit Elastic = 1
Interpretations of
Elasticity of Demand Inelastic Supply < 1
Inelastic Demand Ed < 1

Perfectly Inelastic Ed = 0
Extreme Cases
Perfectly Elastic Ed = Infinity

Antiques = inelastic supply

It measures the degree to which consumers respond a
change in their income by buying more or less of a particular
good Reproduction = more elastic supply
Income Elasticity of Demand Applications of Price Elasticity of Supply
Volatile gold prices = inelastic supply

The income elasticity coefficient is positive.

Large Crop Yields meaning more of these goods are
Excise Taxes
Normal Goods demanded as income increases.
Decriminalization of Illegal drugs Applications of Price Elasticity of Demand

The income coefficient is negative.

Consumers decrease their purchases of these
goods when income increases.
Inferior Goods e.g. Cabbage, long distance bus tickets, used
clothes

HIGH INCOME ELASTICITY

Most affected by Recession
Income LOW OR NEGATIVE INCOME ELASTICITY
Elasticity of Not affected that much by recession
Demand
Insights

Charge different prices to different buyers on price elasticity.

e.g. Business air travel, Children discounts, College Tuition
Elasticity and Pricing Power