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Module 13
Other Elasticities
What’s New in the Fourth Edition?
• New Economics in Action.
• Handouts for use in class.
Module Objectives
• How is the cross-price elasticity of demand related to the responsiveness of demand for one good to
changes in the price of another good?
• What is the meaning and importance of the income elasticity of demand?
• What is the price elasticity of supply and why is it significant?
• What are the factors that influence the size of these various elasticities?
Teaching Tips
The Cross-Price Elasticity of Demand
Creating Student Interest
• Ask your students to describe the relationship between peanut butter and jelly (if you need to, remind
them of the “other goods” determinant of demand). They can be substitutes if you are considering
what to put on your toast and might choose either one. They also can be complements—if you eat
peanut butter and jelly sandwiches. Different people will classify peanut butter and jelly as
substitutes or complements, depending on their tastes. Ask them to come up with a way to determine
if peanut butter and jelly are substitutes or complements for the U.S. population as a whole. Help
them to see that you would need to know how the quantity demanded of peanut butter responds to a
change in the price of jelly.
Presenting the Material
Go back to the treatment of elasticity in general and consider demand. Have students identify the
variables and the dependent/independent variables for cross-price elasticity. Use these to construct
• Do an example of a cross-price elasticity. For example, when the price of jelly goes from $1 to $2,
the quantity of peanut butter Marie buys falls from 30 to 20. (Percentage change in Qd of peanut
• Point out that we don’t use “elastic/unit elastic/inelastic” to describe cross-price elasticity of demand.
What we are interested in finding out is whether Marie buys more or less peanut butter when the
price of jelly goes up. If the price of jelly goes up, Qd of jelly will fall (the law of demand). If less
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The Income Elasticity of Demand
Creating Student Interest
• Ask students to think of products that do not sell well in economic downturns or recessions. Remind
students that income is a determinant of demand so income and quantity demanded are related.
those products with products whose sales do not suffer much during a downturn.
Presenting the Material
• Point out that we don’t use “elastic/unit elastic/inelastic” to describe income elasticity of demand.
Remind students that changes in income will affect demand differently depending on what type of
The Price Elasticity of Supply
Creating Student Interest
• Ask students what they would do if the market price for their textbook suddenly increased to $1,000.
Many of the students will answer that they would sell their textbooks. That is, as potential sellers,
they would be responsive to changes in price.
• Ask students what the supply curve for a resource (like acres of land in a prime location) would look
like if there were only 200 available. Draw (or have a student draw) the graph on the board. How
responsive is the quantity of this resource supplied to a change in price? Show on the graph that the
quantity can never change.
Presenting the Material
• Go back to the treatment of elasticity in general. Have students identify the two variables and the
dependent/independent variables for price elasticity of supply. Use these to construct the formula
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Module Outline
I. The cross-price elasticity of demand
A. The cross-price elasticity of demand between two goods measures the effect of the change in
one good’s price on the quantity demanded of the other good.
B. The sign on the cross-price elasticity value is important; it indicates whether the two goods
are complements or substitutes.
1. When the cross-price elasticity is positive, the two goods are substitutes.
2. When cross-price elasticity is negative, the two goods are complements.
II. The income elasticity of demand
A. The income elasticity of demand measures the responsiveness of quantity demanded to
changes in income.
1. Normal goods have a positive income elasticity (e.g., cars, new homes).
2. Inferior goods have negative income elasticity (e.g., macaroni and cheese).
III. The Price Elasticity of Supply
A. The price elasticity of supply is a measure of the responsiveness of the quantity supplied of a
good to changes in the price of that good.
B. There is perfectly inelastic supply when the price elasticity of supply is zero, so that changes
in the price of the good have no effect on the quantity supplied. A perfectly inelastic supply
curve is a vertical line.
C. There is perfectly elastic supply when even a tiny increase or reduction in the price will lead
to very large changes in the quantity supplied, so that the price elasticity of supply is infinite.
A perfectly elastic supply curve is a horizontal line.
D. What factors determine the price elasticity of supply?
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1. The availability of inputs: When inputs are readily available, the price elasticity of
supply will tend to be large; when the inputs are difficult to obtain, the price elasticity
of supply will tend to be small.
2. Time: The price elasticity of supply tends to be larger the longer the period that
producers have to respond to a price change. Long-run price elasticity of supply is often
greater than short-run elasticity.
Case Studies in the Text
Economics in Action
China and the Global Commodities Glut of 2016—This EIA explores the commodities glut that occurred
in 2016 when Chinese economy faltered.
Ask students the following question:
1. What events conspired to create the global glut of commodities? (In response to increased
Web Resources
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Handout 13-1
Date_________ Name____________________________ Class________ Professor________________
Complements and Substitutes
Make a list of goods you think are complements and goods you think are substitutes.
Substitutes
Complements
Does the same firm ever sell two complementary goods? How can information about cross-price elasticity
help the firm make better decisions? How does knowing your firm sells a good that has a close substitute
affect the decisions you make as a firm?
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Ranking Income Elasticity
Do the following goods have high or low income elasticities? Why?
Bus trips
Gum
New home
New car
Used car
Restaurant meals
Powdered milk
A can of Pepsi
What’s a Baseball Card Worth?
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Answers:
Complements and Substitutes
Make a list of goods you think are complements and goods you think are substitutes.
Substitutes
Complements
Does the same firm ever sell two complementary goods? How can information about cross-price elasticity help
the firm make better decisions? How does knowing your firm sells a good that has a close substitute affect the
decisions you make as a firm?
Yes, firms often sell complementary goods. Cross-price elasticities help them know how to appropriately price
the goods. Knowing my firm also sells a substitute makes me price strategically to maximize firm revenue, not
just product revenue.
Ranking Income Elasticity
Do the following goods have high or low income elasticities? Why?
Bus trips negative income elasticity as bus trips are an inferior good
Gum low income elasticity as gum is small part of income and not likely to need to buy more
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What’s a Baseball Card Worth?
Inform students that there is only one “mint condition” Honus Wagner (he was a shortstop for the Pittsburgh
Pirates in the early 1900s) baseball card in existence. What would the supply curve for this baseball card look
like?