Class Notes (cover part of Chapter 4 in the textbook)
Class Outline
•
More Elasticities of Demand
•
PriceElasticity 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 crosselasticity 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
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '08
 Blanchard
 Income Elasticity, Supply And Demand

Click to edit the document details