Overview
This lecture introduces additional types of elasticity in economics, focusing on price elasticity of supply, cross price elasticity of demand, and income elasticity of demand.
Price Elasticity of Supply
- Price elasticity of supply measures how much quantity supplied changes in response to price changes.
- Supply is inelastic when production or quantity supplied cannot easily be increased (e.g., limited stadium seats).
- Supply is elastic when producers can quickly change what or how much they supply (e.g., easily swapped products in stores).
- Factors affecting elasticity of supply include production flexibility, technology, and barriers to entry.
Cross Price Elasticity of Demand
- Cross price elasticity of demand measures how the demand for one good changes when the price of another good changes.
- If cross price elasticity is positive, the goods are substitutes (e.g., Coke and Pepsi).
- If cross price elasticity is negative, the goods are complements (e.g., hot dogs and hot dog buns).
- A value close to zero indicates a weak relationship between the two goods.
Income Elasticity of Demand
- Income elasticity of demand measures how quantity demanded changes with consumer income.
- Normal goods have a positive income elasticity (demand rises with income, e.g., movie tickets).
- Inferior goods have a negative income elasticity (demand falls as income rises, e.g., used clothing).
- Necessities have an income elasticity close to zero (demand changes little with income, e.g., toilet paper, toothpaste).
- Luxuries have a higher income elasticity, with demand sensitive to income changes.
Key Terms & Definitions
- Price Elasticity of Supply — The responsiveness of quantity supplied to changes in price.
- Cross Price Elasticity of Demand — The responsiveness of demand for one good to changes in the price of another good.
- Substitutes — Goods where a price increase in one raises demand for the other (positive cross price elasticity).
- Complements — Goods where a price decrease in one raises demand for the other (negative cross price elasticity).
- Income Elasticity of Demand — The responsiveness of demand for a good to changes in consumer income.
- Normal Good — A good with a positive income elasticity.
- Inferior Good — A good with a negative income elasticity.
- Necessity — A good with income elasticity close to zero.
- Luxury — A good with high income elasticity.
Action Items / Next Steps
- Review Chapter 5 concepts on elasticity for better understanding.
- Prepare any questions for clarification in the next session.