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Terms in this set (21)

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
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:


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