Class01_25

Class01_25 - Class Notes(cover part of Chapter 4 in the...

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Class Notes (cover part of Chapter 4 in the textbook) Class Outline More Elasticities of Demand Price-Elasticity of Supply More Elasticities of Demand How sensitive is the demand to the change of the price of related goods or to a change in consumers’ income? In order to answer this question we need to introduce two concepts. Def. Cross Elasticity of Demand The cross-elasticity of demand is a measure of the responsiveness of the demand for a good to a change in the price of a substitute or a complement, other things remaining the same. Cross price elasticity= % % d x y q p (a) Suppose croissants and muffins are substitutes in consumption. If the price of Muffins increases, the demand of croissants increases, i.e., Cross price elasticity= % % d x y q p >0. (b) Suppose croissants and cappuccino are complements in consumption. If the price of cappuccino increases, the demand of croissants decreases, i.e., Cross price elasticity= % % d x y q p <0. Implication: The cross price elasticity of demand is positive for a substitute and negative
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This note was uploaded on 04/29/2008 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue.

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Class01_25 - Class Notes(cover part of Chapter 4 in the...

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