# Cross-price elasticity of demand (EA,B)

• Meaning

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

• EA,B and substitutes

• The 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!

• EA,B and substitutes

• The 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
• 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
• 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 