OTHER ELASTICITIES Income elasticity Cross price

OTHER ELASTICITIES • Income elasticity • Cross price elasticity • Price elasticity of Supply

INCOME ELASTICITY (YED) • YED measures the responsiveness of demand to a change in income • Most people will buy MORE when their income RISES • They will buy LESS when their income FALLS • This is not always the case. Examples?

Calculating Income elasticity (YED) % CHANGE IN Q DEMANDED • YED = ____________ % CHANGE IN INCOME

• When an INCREASE in income results in an INCREASE in demand, the YED is POSITIVE (+) – and Vice Versa! • This is the case for normal goods • When an + in Y results in – in Qd, the good is an inferior good. • The YED would be NEGATIVE (-) in this instance

Example of YED • As your income rises, you will buy more normal goods like TV’s, clothes, Steak etc • Therefore a 20% wage rise results in a 40% increase in steak consumption % change Qd (+40 %) YED = ___________ % change Y (+20%) = +2 (The YED for steak is positive and elastic) If the YED for white bread is + 0. 5, what does this say?

• As your income rises, you will buy less inferior goods like powdered milk, Jive, Ackermans clothing etc • Therefore a 20% wage rise results in a 40% decrease in consumption of No name brands YED = % change Qd (-40 %) ___________ % change Y (+20%) = -2 (The YED for inferior goods is neg and elastic)

CROSS PRICE ELASTICITY (XED OR CPED) Measures the responsiveness of Qd of one good to a change in the Price of another CPED = % change Qd of good A ___________ % change in Price of good B So if the price of butter rises by 20% and this causes the demand for margarine to rise by 40%: CPED = % change Qd of marge (+40%) ___________ % change in Price butter (+20%) = +2 A positive CPED means the goods are SUBSTITUTES

However, if the price of petrol rises by 20% and this causes the demand for cars to fall by 40%: CPED = % change Qd of marge (-40%) ___________ % change in Price butter (+20%) = -2 Here the CPED is negative and elastic. A negative CPED means the goods are COMPLEMENTS

Meaning of + and - CPED • + CPED means the goods are SUBSTITUTES – this means you will always buy more of another good when the price of its substitute rises. • If the CPED is + and inelastic eg +0. 8 it means the goods are WEAK substitutes eg Coke and Mixadrink

• - XED means the goods are COMPLEMENTS – this means you will always buy more of a good when the price of another good FALLS when those two goods are used TOGETHER. (vice-versa) • If the XED is - and inelastic eg -0. 8 it means the goods are WEAK complements eg purple ink and fountain pens

Price Elasticity of Supply • PES measures the responsiveness of supply to a change in price % CHANGE IN Q SUPPLIED • PES = ____________ % CHANGE IN PRICE

• The PES is always POSITIVE as producers will always try to supply more at high prices and less at low prices • However, their ability to supply more at high prices depends on their resources, workers, time to adjust production etc • If a 60 % rise in price of oil results in Caltex only increasing S by 10 %, the + 0. 17 indicates that they were unable to refine enough oil quick enough to take advantage of the high price