Transcript Principles of Economics Chapter 20 Sections 3 and 4

Quote of the Day
My impression of life at Big Bri's house, "Son?"
"Yeah, Dad?" "How was your day, son?"
"Great, Dad. How's yours?" "Super. Say, how
would like to go fishing this weekend?" "Great,
Dad. But I got homework to do." "That's okay,
son. You can do it on the boat." "Gee." "Hon,
isn't our son swell?" "Yes, dear. Isn't life
swell?"
Chapter 6 or Chapter 20
Sections 3 and 4
Price Elasticity
Other Demand Elasticities

Cross-price elasticity of demand
• The percentage change in the demand for
one good divided by the percentage change
in the price of a related good, everything else
held constant
Cross-price elasticity of demand =
% change in demand for good j
% change in the price of good k
Other Demand-Price Elasticities


When the cross-price elasticity of demand is +,
the goods are substitutes
When the cross-price elasticity of demand is -,
the goods are complimentary
•
Example
• If a 1% increase in movie ticket prices leads to a 5%
•
increase in movies downloaded on the Internet, movies
at the theatre and movies on the Internet are substitutes
If a 1% rise in movie ticket prices leads to a 5% drop in
the quantity of popcorn consumed, movies and popcorn
are complementary
Income Elasticity of Demand

Income elasticity of demand
• The percentage change in the demand for a
good divided by the percentage change in
income, everything else held constant
Income elasticity of demand =
% change in demand for good j
% change in income
Income elasticity of demand



When the income elasticity of demand is
greater than zero, goods are considered to be
“normal goods”
When the income elasticity of demand for a
good is negative, the good is called an “inferior
good”
If the income elasticity of demand for a good is
a large, + number, the good is considered to
be a luxury good.
The price elasticity of supply

Price elasticity of supply
• The % change in the quantity supplied divided
by the % change in price, everything else held
constant
• Price elasticity of demand is either zero or a +
number
• The steeper the curve, the more inelastic the
•
supply is
The more horizontal, the more elastic it is
Homework

Due Tuesday
• Page 134 or 470 # 2, 3, and 4
• Page 134 or 470 # 5, 6, and 7
• Page 134 or 470 # 10, 11, and 12
• Page 134 or 470 # 13, 14, and 15
• Page 134 or 470 # 8
• Page 134 or 470 # 9