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Cross-Price, Income and
Supply Elasticities
Overheads
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Income Elasticity of Demand
The income elasticity of demand is defined as
the percentage change in quantity divided by
the percentage change in income,
all other influences remaining constant
Income elasticity of demand
I

%Q
D
%I
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Price and Income Elasticities of Demand
Income elasticity measures shifts in the demand curve
Price elasticity measures movements along the curve
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Demand for Q
6
8
10
12
14
16
18
20
22
24
26
28
30
32
20 30 40 50 60 70 80 90 100 110 120
Quantity
P
r
i
c
e

D1, I = 3000
Graphical Analysis
D2, I = 4000
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Price Income Demand
13.00 3000.00 68.75
14.00 3000.00 63.74
20.00 3000.00 44.20
21.00 3000.00 42.03
Computing price elasticity (income constant)
13.00 4000.00 91.83
14.00 4000.00 85.17
20.00 4000.00 59.20
21.00 4000.00 56.31


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(Q
1
Q
0
)
( P
1
P
0
)
(P
1
P
0
)
( Q
1
Q
0
)

D

%Q
D
%P
Price Elasticity of Demand (Income = 4000)
Price Income Demand
20.00 4000.00 59.20
21.00 4000.00 56.31

(56.3159.20)
(21 20)
(21 20)
(56.31 59.20)

(2.89)
(1)
(41)
(115.51)
1.0257
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(Q
1
Q
0
)
( P
1
P
0
)
(P
1
P
0
)
( Q
1
Q
0
)

D

%Q
D
%P
Price Elasticity of Demand (Income = 3000)
Price Income Demand
20.00 3000.00 44.20
21.00 3000.00 42.03

(44.2042.03)
(21 20)
(21 20)
(44.20 42.03 )

(2.17)
(1)
(41)
(86.23)
1.03177
-1.0257
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Price Income Demand
13.00 3000.00 68.75
14.00 3000.00 63.74
20.00 3000.00 44.20
21.00 3000.00 42.03
13.00 4000.00 91.83
14.00 4000.00 85.17
20.00 4000.00 59.20
21.00 4000.00 56.31
Computing income elasticity (price constant)
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Price Income Demand
13.00 3000.00 68.75
14.00 3000.00 63.74
20.00 3000.00 44.20
21.00 3000.00 42.03
13.00 4000.00 91.83
14.00 4000.00 85.17
20.00 4000.00 59.20
21.00 4000.00 56.31
Q
Computing income elasticity (price constant)
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Demand Data on Q
Price Income Demand
13.00 3000.00 68.75
14.00 3000.00 63.74
20.00 3000.00 44.20
21.00 3000.00 42.03
13.00 4000.00 91.83
14.00 4000.00 85.17
20.00 4000.00 59.20
21.00 4000.00 56.31
Q
I
ebooks.edhole.com

I
%Q
D
%I
Income Elasticity of Demand
Price Income Demand
20.00 3000.00 44.20
20.00 4000.00 59.20

(Q
1
Q
0
)
( I
1
I
0
)
(I
1
I
0
)
( Q
1
Q
0
)

(44.259.20)
(3,000 4,000)
(3,000 4,000)
(44.2 59.20)

(15)
(1000)
(7,000)
(103.4)
1.01547
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Normal and Inferior Goods
Normal goods have a positive income elasticity
Inferior goods have a negative income elasticity
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Necessities and Luxuries
Necessities typically have an income elasticity
between 0 and 1
Luxuries typically have an income elasticity
greater than 1
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Examples
Fresh Fruit
Transportation (???)
Potatoes
Eating out
Cigarettes
Food
Meat (Steak)
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Cross-price Elasticity of Demand
The cross price elasticity of demand is defined as
the percentage change in the
quantity demanded of one good,
all other influences remaining constant
divided by the percentage change in the
price of a different good,
We denote the cross price elasticity of good i for good j
as
ij
where

ij

%Q
D
i
%P
j
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We can then rewrite this as

(Q
1
i
Q
0
i
)
( P
1
j
P
0
j
)
(P
1
j
P
0
j
)
(Q
1
i
Q
0
i
)

ij

%Q
D
i
%P
j
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Elasticities of Demand
Income elasticity measures shifts in the demand curve
Price elasticity measures movements along the curve
Cross-price elasticity measures shifts in the demand curve
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Demand for Q1
8
10
12
14
16
18
20
22
24
26
28
30
32
20 30 40 50 60 70 80 90 100
Quantity
P
r
i
c
e

D1, P2 = 10
D1, P2 = 50
Graphical Analysis
Demand Data for Alternative Prices of Good 2
P1 P2 Income D1
13.00 10.00 3,000 68.75
14.00 10.00 3,000 63.74
13.00 50.00 3,000 72.45
20.00 10.00 3,000 44.20
21.00 10.00 3,000 42.03
14.00 50.00 3,000 67.17
20.00 50.00 3,000 46.60
21.00 50.00 3,000 44.31
22.00 50.00 3,000 42.24
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Demand Data for Alternative Prices of Good 2
P1 P2 Income D1
13.00 10.00 3,000 68.75
14.00 10.00 3,000 63.74
13.00 50.00 3,000 72.45
20.00 10.00 3,000 44.20
21.00 10.00 3,000 42.03
14.00 50.00 3,000 67.17
20.00 50.00 3,000 46.60
21.00 50.00 3,000 44.31
22.00 50.00 3,000 42.24
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D

%Q
D
%P
Price Elasticity of Demand
Price Income Demand
20.00 3000.00 44.20
21.00 3000.00 42.03

(Q
1
Q
0
)
(P
1
P
0
)
(P
1
P
0
)
( Q
1
Q
0
)

(44.2042.03)
( 20 21)
( 20 21)
( 44.2 42.03)

(2.17)
(1)
(41)
(86.23)
1.03177
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Cross-price elasticity of demand for good 1
as the price of good 2 changes from $10 to $50

ij

%Q
D
1
%P
2
P1 P2 Income D1
20.00 10.00 3,000 44.20
20.00 50.00 3,000 46.60

(Q
1
1
Q
0
1
)
(P
1
2
P
0
2
)
(P
1
2
P
0
2
)
( Q
1
1
Q
0
1
)

(44.246.60)
( 10 50)
(10 50)
(44.2 46.60)

(2.4)
(40)
(60)
(90.80)
.0396
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Substitutes and Complements
Goods are said to be substitutes if
ij
> 0
Goods are said to be complements if
ij
< 0
Goods are said to be close substitutes if
ij
>> 0
Demand goes up as other price goes up
Demand goes down as other price goes up
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Substitutes
Beef and Pork
Rice Chex and Life Cereal
Ford and Dodge Cars
Margarine and Butter
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Complements
Food and Entertainment
Cars and Gasoline
Printers and Printer Paper
Televisions and VCRs
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Break
The elasticity of supply is defined as
the percentage change in quantity supplied
divided by the percentage change in price,
Elasticity of Supply
all other influences remaining constant

s
%Q
S
%P
(Q
S
1
Q
S
0
)
(P
1
P
0
)
(P
1
P
0
)
(Q
S
1
Q
S
0
)
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The elasticity of supply
measures movements along the supply curve
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Graphical Analysis
Supply of Shirts
0
25
50
75
100
125
150
175
200
225
250
275
300
325
350
375
400
0 10 20 30 40 50 60 70 80 90 100
Quantity
P
r
i
c
e

Q P
0 0
5 20
10 40
15 60
20 80
25 100
30 120
35 140
40 160
45 180
50 200
55 220
60 240
Supply Data

%Q
S
%P

(Q
S
1
Q
S
0
)
(P
1
P
0
)
(P
1
P
0
)
(Q
S
1
Q
S
0
)

(25 20)
(100 80)
(100 80)
(25 20)

(5)
(20)
(180)
(45)

1
4
4 1
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1
4
4 1
Another Example of Elasticity of Supply
Q P
50 200
55 220

%Q
S
%P

(Q
S
1
Q
S
0
)
(P
1
P
0
)
(P
1
P
0
)
(Q
S
1
Q
S
0
)

(50 55)
(200 220)
(200 220)
(50 55)

(5)
(20)
(420)
(105)
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Factors affecting the elasticity of supply
Supply will be more elastic, the more alternatives
producers of it have for production.
Supply will be more elastic if the market
is defined narrowly.
Supply will be much more elastic in the long run.
Supply will be more inelastic if there are biological
or other lags in production
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Classification of the elasticity of supply
Inelastic supply
When the numerical value of the elasticity of supply
is between 0 and 1.0, we say that supply is inelastic.

%Q
S
%P
< 1
%Q
S
< %P
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Elastic supply
When the numerical value of the elasticity of supply
is greater than 1.0, we say that supply is elastic.

%Q
S
%P
> 1
%Q
S
> %P
Classification of the elasticity of supply
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Unitary elastic supply
When the numerical value of the elasticity of supply
is equal to 1.0, we say that supply is unitary elastic.

%Q
S
%P
1
%Q
S
%P
Classification of the elasticity of supply
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Classification of the elasticity of supply
Perfectly elastic -
S
=

Perfectly inelastic -
S
= 0

horizontal
vertical
Very short run response
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Demand for food and food products is generally price inelastic
Supply of many crops is stochastic due to weather, disease, etc
Thus we tend to see large changes in price and thus net farm income
Analysis of an agricultural market

%Q
D
%P
< 1

%P
%Q
D
> 1
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End of Presentation
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