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Elasticity of Supply

The document defines and explains four economic concepts related to elasticity: 1) Elasticity of supply measures the responsiveness of quantity supplied to changes in price of a good. 2) Elasticity of labor supply measures the response of labor supplied to changes in wage rates. 3) Income elasticity of demand measures the response of demand to changes in consumer income. 4) Cross-price elasticity of demand measures the response of demand for one good to price changes in another good. It indicates whether goods are substitutes or complements.

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68 views14 pages

Elasticity of Supply

The document defines and explains four economic concepts related to elasticity: 1) Elasticity of supply measures the responsiveness of quantity supplied to changes in price of a good. 2) Elasticity of labor supply measures the response of labor supplied to changes in wage rates. 3) Income elasticity of demand measures the response of demand to changes in consumer income. 4) Cross-price elasticity of demand measures the response of demand for one good to price changes in another good. It indicates whether goods are substitutes or complements.

Uploaded by

hassam
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Elasticity of Supply

Key points

01 Elasticity of Supply

02 Income Elasticity of Demand

03 Cross-Price Elasticity of Demand


Elasticity of Supply

elasticity of supply A measure of the response of quantity of


a good supplied to a change in price of that good. Likely to be positiv
e in output markets.

% change in quantity supplied


elasticity of supply 
% change in price
Elasticity of Supply

elasticity of labor supply A measure of the response of labor supplied to a cha


nge in the price of labor.

% change in quantity of labor supplied


elasticity of labor supply 
% change in the wage rate
Income Elasticity of Demand

income elasticity of demand A measure of the responsiveness of demand t


o changes in income.

% change in quantity demanded


income elasticity of demand 
% change in income
Income Elasticity: Types of Goods

• Normal Goods (E>0). These are goods whose consumption increases with an in
crease in income.

– Necessity (E<1). These are goods whose consumption increases an


amount smaller than an increase in income.
– Luxury Good (E>1). These are goods whose consumption increases an
amount larger than an increase in income.

• Inferior Good (E<0). These are goods whose consumption decreases with an
increase in income.
Income elasticity
Product Short Run Long Run
Motion pictures 0.81 3.41
Foreign travel 0.24 3.09
Tobacco products 0.21 0.86
Furniture 2.60 0.53
Jewelry and watches 1.00 1.64
Cross-Price Elasticity of Demand

cross-price elasticity of demand A measure of the response of the quantity of o


ne good demanded to a change in the price of another good.

% change in quantity of Y demanded


cross - price elasticity of demand 
% change in price of X
• How much the quantity demanded of one good responds to a change in the price
of another good. (Relationship between two Goods)

• Percentage change in quantity demanded of the first good


• Divided by the percentage change in price of the second good
Cross-price Elasticity: Types of Goods

• Substitutes
– Goods typically used in place of one another
– Positive cross-price elasticity (Exy is positive)

• Complements
– Goods that are typically used together
– Negative cross-price elasticity (Exy is negative)
Printers and ink Coca-cola and Pepsi

Seeds and fertilizers Car, motorbike, bike and public transport


Vs
DVD players and DVD disks Butter and margarine

Car and fuel Tea and coffee


YouTube Resource:
Elasticity of Supply
https://www.youtube.com/watch?v=AAWsuFXojgo

Elasticity of Labor Supply


https://www.youtube.com/watch?v=ONjfcLDcXSU

Income Elasticity of Demand


https://www.youtube.com/watch?v=A2Yz-Bn9g9A

Cross-Price Elasticity of Demand


https://www.youtube.com/watch?v=ViEolFkmBxU
Web Resources
Elasticity of Supply
https://www.toppr.com/guides/business-economics/theory-of-supply/elasticity-of-sup
ply/
Elasticity of Labor Supply
http://www.econ.nyu.edu/user/violante/NYUTeaching/Macrotheory/Spring14/Lecture
Notes/lecture12_14.pdf

Income Elasticity of Demand


https://www.investopedia.com/terms/i/incomeelasticityofdemand.asp

Cross-Price Elasticity of Demand


https://www.investopedia.com/terms/c/cross-elasticity-demand.asp
Books:
Elasticity of Supply
Principles of Economics / Karl E. Case, Ray C. Fair, Sharo
n M. Oster. — 10th ed. Chapter 5, Elasticity Pg.97
ISBN-13: 978-0-13-255291-2.
Elasticity of Supply Pg# 111
Elasticity of Labor Supply Pg# 109
Income Elasticity of Demand Pg# 110
Cross-Price Elasticity of Demand Pg# 110

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