Cross Price Elasticityand

Price Elasticity of Supply

Review: eP

• Price elasticity of demand measures how much demand changes when price is changed.

• Arc elasticity calculates % change by comparing to the average values of two values

• eP is affected by– Number of substitutes– Time– Portion of income the

purchase represents– Luxury v. staple good

PP/

QQ/

Pe

Cross-Price Elasticity

• Cross-Price Elasticity: how do changes in price of one product affect demand of another product?

• (How does change in price of mp3 songs affect demand for iPhone?)

• Positive eAB : Substitutes

• Negative eAB : Complements

• Zero eAB : Not related B

A

P%

Q%

ABe

Price Elasticity of Supply

• Price elasticity of supply: how much does quantity supplied change when price changes?

• Measure of responsiveness of supply to price

• eS is typically positive. Why?

• Which products have high price elasticity of supply?

• Low? P%

Q% S

Se

Perfect Elasticity and Inelasticity

• Perfectly elastic: infinite quantity change for any price change

• Perfectly inelastic: no quantity change, regardless of price change

• How would you graph these?

• Any examples?

Quantity

Price

D or S

Quantity

Price D or S

Elasticity and Time• Time generally

increases the elasticity of demand or supply

• Demand: time allows consumers greater choices in their options

• Supply: time allows suppliers a chance to produce, which takes time

• Example: supply of sushi restaurant dinners in Boulder

• Example: demand for mp3 songs

Testosterone Elasticity of Income?Male traders who were exposed

to higher levels of testosterone before birth go on to make the most money. High levels of the hormone during pregnancy causes the ring (or fourth) finger to grow longer than the index (or second) finger, both of which were measured on the right hand of 44 traders. The researchers also recorded the profit and loss statements for 20 months of these “high frequency” futures traders, who held positions of up to £1 billion ($2 billion, at the time of the study) for as little as a few seconds. Even accounting for experience, men with the longest ring fingers earned far more than those with more evenly matched fingers. They also stayed in the business for longer. (Economist, 15 Jan 2009)