the cross-price elasticity of demand measures how a change in price of one good can affect the quantity demanded of another good. The formula to calculate the cross-price elasticity of demand using the midpoint method is given belo. CPEa,b refers to the cross-price elasticity between goods A and B, Qd refers to quantity demanded and P refers to price.
CPEa,b = Percentage change in Qd of Good B/Percentage change in P of Good A.
if you have the percentage changes already, such as in the first and third pairs of goods, you can just plug them into the formula. Otherwise, recall that the midpoint method is used to prevent different results when starting at the two different points:
midpoint method of percentage changes = (value2-value1)/[(value1+value2)/2]
for products A and B, there is no change in quantity demanded for product B. The numerator in the cross price-elasticity formula is thus 0, and the percentage change in price for Product A becomes irrelevant. This indicates that the quantity demanded for Product B is not responsive to price changes in Product A, so the two goods have no relationships.
for product C and D, use the midpoint method (since we dont have percentage but we have values):
CPEc,d = 0.571/0.75=0.8
the positive sign indicates that the quantity demanded of D reacts in the opposite direction as that of C. This indicate that the two goods are substitutes.
lastly, for product E and F, the percentage changes are provided, so just make sure to use the price change of E (-9)and the quantity change in (+12) F.
CPEe,f = 12/-9=-1.3
As the sign is negative, this indicates that the two goods are complements
Shep buys one large latte everyday, no matter what the price is. On half price Mondays, lattes cost half of the normal cost, but even with this price decrease, he still only buys one large latte. Thus, no matter what the price is, the quantity demanded stays constant. This illustrate the case of zero (or perfect) inelasticity.
The graph for this curve would be a vertical straight line, where Shep always purchases one large latte, no matter what the price is.
Here, elasticity is the percentage change in quantity demanded over the percentage change in price. To calculate this numerically, let's say a large latte usually cost $4, but on Monday it costs $2. To calculate this:
Q NEW - Q OLD = 1-1 = 0 = 0 = 0 = 0
notice that it doesn't matter what the price change would be. The elasticity remains zero in any case.
the price of elasticity of supply is very similar to the price elasticity of demand, with the main difference being that we are looking at changes in the supply curve instead of the demand curve, and the other difference being that we do not take the absolute value of the price elasticity of supply. The equation to calculate the price elasticity of supply is:
PRICE ELASTICITY OF SUPPLY = CHANGE PERCENTAGE IN QUANTITY SUPPLIED / CHANGE PERCENTAGE IN PRICE
Perfectly inelastic supply occurs when the price elasticity of supply is EQUAL TO 0. This occurs when price changes CAUSE NO CHANGE IN quantity supplied. Graphically, this is a vertical line and most common occurs when there is only a fixed quantity of the good. Here, since Duchamps is dead, he cannot produce anh more original works. Thus, there are a fixed number of art pieces making the supply perfectly inelastic.
Perfectly inelastic supply occurs when a price fluctuation has an infinitely large impact on the quantity supplied. In our donut example, below $1, it is not profitable for Paul to sell the donuts, but at any price above $1, he would be more than glad to supply any number of donuts. As a result of this willingless to supply more when prices increases, the price elasticity of supply is essentially infinite, graphically represented by a horizontal line.
Elasticity supply occurs when the price elasticity of supply is greater than 1 as shown in the case of Puff's.
Unit-elastic supply occurs when the percentage change in quantity supplied is equal to the percent change in price, as in the case with the pens.
Inelastic supply occurs when the price elasticity of supply between 0 and 1 as is the case with the light bulbs. Input availability is a big factor in the elasticity of supply, as the more readily available an input is, the easier it is to produce more of a good
the most effective policy is such that the rent (price_ decreases and the change in the apartments rented is small. If supply is stimulated with a subsidy, this shift the supply curve, causing the equilibrium to shift along the relatively elastic demand curve, resulting in a large change in quantity for a small change in price, which is not desired here.
If demand is redirected elsewhere (thus, reducing demand within the downtown area), this shifts the demand curve, causing the equilibrium to shift along the supply curve. Since the supply is relatively inelastic, a large change in price comes along with a small change in quantity, which was the stated goal.
2. In this example, demand is more elastic than supply (because the supply curve is more vertical, while the demand curve is more horizontal)
3. This policy involves shifting along the curve with lower elasticity (and thus, changes in price result in small changes in quantiy). The policy that increases supply is the one subsidizing low income apartments within the downtown area.
Recall that rent control is a type of price control that creates a shortage, and thus, was not one of the two alternate policies considered.
When the price increases, the price effect tends to increase total revenue since each unit sells for a higher price. However, it si not always true that a price increase will actually lead to higher total revenue. If the quantity effect is stronger than the price effect and the number of units sold decreases dramatically as a result of the price increase, total revenue may go down
In the long-run elasticity of supply is typically larger than the short-run elasticity of supply and not the other way around because in the long-run, producers have more time to react to price change: the more flexibility (here in planning and time), the more elastic the curve.
The question of whether a good is a luxury item in the determining its relative elasticity is a factor that affects price elasticity of demand, not supply.
When supply is perfectly inelastic, a change in demand does not have an effect on the price. On a straight vertical line, a shifted demand curve will create a new equilibrium price. it is quantity that doesn't change. On the other hand, with a perfectly elastic supply curve (a horizontal line), regardless of where the demand shift. the price remains the same.
9th EditionN. Gregory Mankiw 8th EditionN. Gregory Mankiw 10th EditionN. Gregory Mankiw 21st EditionCampbell R. McConnell, Sean M. Flynn, Stanley L. Brue