Learning Objectives:
Elasticity
LO4: Use real-world examples to demonstrate that the concept of elasticity is a powerful tool
LO5: Understand the meaning and significance of elasticity of supply, income elasticity, and cross-elasticity of demand
CHAPTER 4
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Elasticity of Supply
• a measure of how much quantity supplied changes as a result of a change in price
• can be expanded to:
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LO5
s% quantity supplied
% price
s
ss
Q100
average QP 100
average P
Elasticity of Supply
Example: When price changes from $2 to $3, the quantity supplied rises from 400 to 500.
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LO5
100 100 22.2%450 0.551 40%100
2.5
s
ss
Q100
average QP 100
average P
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Perfectly Inelastic Supply
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Income Elasticity
• the responsiveness of quantity demanded to a change in income
• can be expanded to:
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LO5
dY
% quantity demanded (Q )% income (Y)
d
dY
Q100
average QY 100
average Y
Income Elasticity
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If coefficient is:
Type of Good:
Demand is:
Greater than 1Normal –
Luxury good Income elastic
Less than 1 but greater than 0
Normal – Necessity
Income inelastic
Less than 0 Inferior goodNegative income
elasticity
Income Elasticity
TABLE 4.9 Differences in Spending between the Richest and Poorest Groups in Canada, 1996
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Income Inelastic Income Elastic
Category
Lowest income
percentileHighest income
percentile CategoryLowest income
percentileHighest income
percentileFood 20.1% 15.9% Furniture 2.7% 4.3%Shelter 34.6 21.9 Clothing 4.4 7.3Public Privatetransport 2.0 1.7 transport 9.6 17.6Household Recreation 4.9 9.1operation 7.2 6.6 Education 1.3 2.2Tobacco &alcohol 3.9 2.8
Source: Based on Statistics Canada, Family Expenditure in Canada, 1996, catalogue no. 62-555-XPB, released on July 28, 1998.
Self-Test
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You are given the following data. Assume that the prices of X and Y do not change:
a) Calculate the income elasticity for products X and Y.
b) Are products X and Y normal goods?
LO5
Income Quantity Demanded of X
Quantity Demanded of Y
$10 000 200 5015 000 350 54
Self-Test
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You are given the following data. Assume that the prices of X and Y do not change:
a) Calculate the income elasticity for products X and Y.
LO5
Income Quantity Demanded of X
Quantity Demanded of Y
$10 000 200 5015 000 350 54
Self-Test
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You are given the following data. Assume that the prices of X and Y do not change:
b) Are products X and Y normal goods?
LO5
Income Quantity Demanded of X
Quantity Demanded of Y
$10 000 200 5015 000 350 54
Cross Elasticity
• responsiveness of the change in Qd of product A to a change in the price of product B
• can be expanded to:
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AB% quantity demanded of product A
% price of product B
Ad
Ad
AB B
B
Q100
average Q
P 100average P
Cross Elasticity
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Margarine Butter
PriceQuantity Demanded
per Week (lb.)Price
Quantity Demanded per Week (lb.)
$1.50 5000 $3.00 10002.10 3200 3.00 2000
AB
1000100 67%1500 2
0.60 33%100
1.80
Ad
Ad
AB B
B
Q100
average Q
P 100average P
Cross Elasticity
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LO5
If coefficient is: Goods are:
Positive Substitutes
Negative Complements
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