microbook_3e-page71

microbook_3e-page71 - doesn’t shift at all It remains...

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Demand Curves in the Case where Donuts are neither a Gross Complement nor a Gross Substitute for Coffee Notice how a decrease in the price of donuts, increases the quantity of donuts that I demand. Specifically, when the price is $2, I demand 25 donuts, but when the price is $1, I demand 50. By connecting those two points on a graph we can sketch out the demand curve. The price elasticity of demand for donuts is constant (all along this demand curve) and equal to negative one. Since donuts are neither a gross complement nor a gross substitute for coffee, the demand curve for coffee
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Unformatted text preview: doesn’t shift at all. It remains right where it was before the price of donuts fell. Therefore, the elasticity of demand for coffee with respect to the price of donuts equals zero. Is this realistic? Maybe. But it seems more plausible to me that I would use some of my increased purchasing power to buy more coffee. In such a case, donuts would be a gross complement to coffee and we’d have to modify our analysis – as I’ll do on the next three pages. Page 71...
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