# Cross-price elasticity of demand (E_{A,B})

Meaning

- Measure used to show the change in the
**price**of**one good**affecs the**demand**for**another good**.

- Measure used to show the change in the
Formula

Percentage change in

**Quantity Demanded**of**Good A**divided by**Percentage change**in**Price**of**Good B**

# Substitutes

Definition

If the coefficient is

**positive**, then the two items are**substitutes.***Do

**NOT**find the absolute value for cross-price elasticity!

E

_{A,B}and substitutesThe

**higher**the number, the**more perfect**the two items are as**substitutes.**The

**lower**the number, the**less perfect**the two items are as**substitutes.**

Price change and quantity demanded

If the

**price**of Good A**increases**, then the**quantity demanded**of Good B will**increase**.If the

**price**of Good A**decreases**, then the**quantity demanded**of Good B will**decrease**.

Example

# Complements

Definition

If the coefficient is

**negative**, then the two items are**complements.***Do

**NOT**find the absolute value for cross-price elasticity!

E

_{A,B}and substitutesThe

**more negative**the number, the**more perfect**the two items are as**complements.**The

**less negative**the number, the**less perfect**the two items are as**complements.**

Price change and quantity demanded

If the

**price**of Good A**increases**, then the**quantity demanded**of Good B will**decrease**.If the

**price**of Good A**decreases**, then the**quantity demanded**of Good B will**increase**.

Example

# Income Elasticity of Demand

Meaning

- Measures how changes in
**income**affect the**demand**for a good

- Measures how changes in
Normal good vs. Inferior good

If the income elasticity of demand is

**positive**, then it's a**normal**good.If the income elasticity of demand is

**negative**, then it's a**inferior**good.

Income-elastic vs. income-inelastic

If the income elasticity of demand is

**greater than 1**, then it is**income-elastic**If the income elasticity of demand is

**less than 1**, then it is**income-inelastic**

Formula

Percentage change in

**Quantity Demanded**Divided by Percentage change in**Income**

Example 1

- Income elastic good:

Example 2

- ceteris paribus: all other things being equal

Example 3

# Price Elasticity of Supply

Meaning

- Measure of responsiveness of the quantity of a good
**supplied**to the**price**of that good

- Measure of responsiveness of the quantity of a good
Formula

**Percentage**change in**quantity supplied**divided by the**percentage**change in**price**

Availability of inputs affects elasticity

- Supply of pizza tends to be very elastic

Supply of cell phone frequencies is zero. The input (radio spectrum) cannot be changed

Graph

# Summary for Elasticity