4 Types of Elasticity

Elasticity Wrap-Up
 3 other Types of Elasticity
• Cross-price elasticity of demand
– between 2 goods If Price Soda ↑ => Qty Demanded for Juice Drinks ?

• Income Elasticity of Demand

=> Demand for normal goods?
If Income ↑
=> Demand for inferior goods?

• Elasticity of Supply
– How supply changes when price changes
 Cross-price elasticity of demand
• Change in quantity demanded of one good in response to a
change in price of another good
% ∆ in Qty Dgood B
Cross-price elasticity of demand =
% ∆ in Pgood A

• Substitutes have positive cross-price elasticity Ea,b > 0

– Example: Price soda ↑ => Qty D other drinks ↑

• Complements have negative cross-price elasticity Ea,b < 0

– Example: Price gas ↑ => Qty D large SUV’s ↓
 Income Elasticity of Demand
• Income elasticity of demand- how much quantity demanded
responds to a change in consumers’ income
– EI = % ∆ in Qty Demanded
% ∆ in Income

• Normal Goods have positive Income elasticity (normal good = Income ↑, Qty D ↑)
• Inferior Goods: EI < 0 (negative income elasticity)
• Income elastic: EI >1 (considered a luxury)
• Income inelastic: 1 > EI > 0 (considered a necessity)
 Elasticity of Supply
S1
Elastic: Es > 1
$5 S
------------------------ $5 --------
1
Inelastic:

--------------

--------------
$4 ------------

----------
$4 ------
Es < 1

-------
100 200 100 120

• Depends on 2 primary factors:

1) Ability to increase quantity produced
– Beach front property is inelastic (hard to increase quantity)
– Books, cars are elastic

2) Time Period
– Supply is more elastic in long run vs. short run
– Time allows companies to produce more