Unit 2 Supply and Demand Copyright ACDC Leadership

Unit 2: Supply and Demand Copyright ACDC Leadership 2019 1

Topic 2. 5 Other Elasticities Copyright ACDC Leadership 2019

Cross-Price Elasticity of Demand (XED) Measures how sensitive quantity demanded of one product is to a change in price of a different product Copyright ACDC Leadership 2018 6

Cross-Price Elasticity of Demand • Cross-Price elasticity of demand shows how sensitive a product is to a change in price of another good • It shows if two goods are substitutes or complements % change in quantity of product “b” % change in price of product “a” P increases 20% • • Q increases 40% Q decreases 40% If coefficient is positive (shows direct relationship) then the goods are substitutes If coefficient is negative (shows inverse relationship) then the goods are complements Copyright ACDC Leadership 2018 7

Answer the following questions 1. The price of inkjet printers increases by 25% and the quantity demanded of ink cartridges decreases by 50%. Calculate the cross-price elasticity of demand & identify the type of goods inkjet printers and ink cartridges are. -2, Complements 2. The price of Netflix increases by 40% and the quantity demanded of Blu-ray discs increases by 10%. Calculate the cross-price elasticity of demand & identify the type of goods Netflix and Blu-ray movies are. Copyright ACDC Leadership 2018 0. 25, Substitutes 8

Income Elasticity of Demand (YED) Measures how sensitive quantity demanded is to a change in income Copyright ACDC Leadership 2018 9

Income-Elasticity of Demand • Income elasticity of demand shows how sensitive a product is to a change in INCOME • It shows if goods are normal or inferior % change in quantity % change in income Income increases 20%, and quantity decreases 15% then the good is a… INFERIOR GOOD • If coefficient is positive (shows direct relationship) then the good is normal • If coefficient is negative (shows inverse relationship) then the good is inferior Ex: If income falls 10% and quantity falls 20%… Copyright ACDC Leadership 2018 10

2008 Audit Question 34 11

2010 Question 6 Copyright ACDC Leadership 2018 12

Practice Questions 1. If the cross price elasticity coefficient of goods A and B is -5 and the income elasticity of good A is 2, which of the following is true? A. A decrease in the price of good A will decrease the demand for good B B. An increase in income will decrease the demand for good A C. Goods A and B are substitutes D. Good B is an inferior good E. An increase in the price of A will decrease the demand for good B Copyright ACDC Leadership 2018 13

2016 FRQ #1 14

Copyright ACDC Leadership 2018 15