Okay, so now let's review another type of elasticity, that's in terms of income
elasticity. But another type of elasticity is the
price of other goods. Remember that the price of other goods was
one of the determinants that we had for, for demand.
So, again, we're not deviating for, from our typical elasticity equation originally
was, the percent of change in the quantity of x to a percent of change in the price
of x. And we do that and we want to evaluate
instead of price income. We change a p for i.
Now, we want to see, what is the effect of a change in a different price of other
good not the, the price of x. And we call it a cross price.
And what we're going to do. We're going to do, well.
We're still interested in the percent of change in the quantity of x.
But this is going to be as a result of a change in the price of a different good.
Not the price of x but the price some other good, which is y.
So this is the cross-price elasticity of demand.
How demand for something responds to a change in the price for something else.
So for instance, let's say that the price percentage change and the price of x is
equal to an increase of 10%. And let's say that this x and for this
particular example. This x is I don't know?
Let's say pizza. Right?
So that's the that's, I'm sorry. This is the price of y here.
So this is the, the, the price of pizza goes up and let's say that the interest,
that your interest is how that affects the consumption of x, say that y is pizza and
x is beer. All right.
So, now, I want to see how an increase in the price of Ppizza affects your
consumption of beer. Right?
Again we can have two, two situations. One situation is an increase in the price
of pizza reduces your consumption of beer, or an increase in the price of pizza
increases your consumption of beer. And whether it's going to be positive or
negative is related to how pizza and beer are related for you, or for most
consumers, in consumption. So, I usually use this one because it's
not a clear one, right? For me, pizza and beer are complements.
Meaning that if the only time, assuming, alright?
This is in the extreme. Well, let's say that the only time I
actually drink a beer is for in fact I actually drink it with pizza.
And if I cannot have pizza I don't drink beer, right?
So if that's the case, then if the price of pizza goes up it will be more difficult
for me to buy the two things together which is the way I want to consume them,
pizza and beer. And therefore I might decide, well, I
might instead eat a burger which I like to eat it with a soda instead of a pizza.
So when the price of pizza goes up, my consumption of beer goes down.
And when the price of pizza goes down, now I can buy even more pizzas and I need beer
to drink that so my consumption of beer goes up.
So if the increase in the price of y leads to an increase a decrease in the price a
change in y, then what you have, the result of this, will be a negative sign of
this cross-price elasticity, right? So this will be a negative sign.
And the relationship of those two goods are complements.
So, for any good that you consume together, when the price of one go up,
since you've seen both goods as 1 good for you.
When the price of one good go up, your consumption of that good goes down.
And when the price of that composite good goes down, the consumption go up.
Examples of complements, there's many examples.
I use pizza and beer, perhaps. You don't actually think pizza and beer
are complements. I think they are but other ones cream
cheese and bagels, right? Gasoline and cars.
What else? Hot dog buns and hot buns.
Peanut butter and jelly, right? So all those things, you like to consume
them together. Right?
Sugar and coffee. Right?
All those things. And when the price of one thing goes up.
You probably consume less of the other one, because you like them to consume
together. Another type of relationship that you can
have, is one in which an increase in the price of 1 thing leads to a increase in
the price of the other thing. So, let's say that you're talking about
roses. Let's say that the price of let's say
we're talking about flowers start with carnations.
Let's say the price of y again goes up by 10% and now y are carnations.
And you want to find out, carnations, you want to find out what is the effect of an
increase in the price of carnations. Not in the consumption of carnations but
in the consumption of roses. Right?
So if the price of carnation go up by 10%, what do you think will happen to your
consumption of roses? Well then you start to deal with the
relationship between carnations and roses. Do you like to, when you like to you know
you mess up with your girlfriend, and you want to buy them some flowers.
Do you usually like to buy carnations and roses?
Probably, not. If you have the roses, you're in pretty
good shape, right, if you want, your girlfriend like flowers, she probably
going to like roses, so you should probably give her roses.
But you go to the counter to pay and you see a sign that says carnations on sale
for you know, for $1 and you're paying $20 for every rose.
Well clearly you're going to say hey, well wait.
I can give my girlfriend 1 rose but I could give her 20 carnations, right.
So she might actually like them the same. She may not.
And usually she probably not, but you may actually be thinking that, that you can
switch to the carnations instead of the roses.
Because I think in general most people think of carnations and roses as
subsidies. If the, if, if the, you can they cannot,
they're not the same, but they serve kind of the same purpose.
So if the price of roses, or the price of carnations goes down, you may be tempted
to use some of the money you going to use for roses for carnations.
So in that case the price elasticity, this price of elasticity, which is a percent of
change in the quantity of x, roses over the percent of change in the price of y
roses, is probably going to be positive. An increase in the price of a decrease in
the price of rose, of carnations reduces your consumption of roses.
And an increase in the price of carnations increases your consumption of roses.
Right? So, in this case, if your price of
carnations goes up by 10%, your consumption of roses also go up by some
percent. I can say, 10%.
We call this goods again substitutes. And there's plenty of examples of that,
classic substitutes, butter and margarine, coffee and, and tea alcohol and marijuana,
right? And all the things that you can use one
thing instead of the other. The relationship between the price and the
consumption of the other thing is going to be one for, for substitute which is that
the price of one goes up, the consumption of the other one goes up, and price of one
goes down, the consumption of the other one goes down.
So that is all the elasticity's in terms of demand that we have to talk about in
this class. We still have to cover the price
elasticity of supply and then we're going to do an application of this elasticity
stuff when we when we talk about taxes. [music] Produced by OCE, Atlas Digital
Media, at the University of Illinois. Urbana-champaign.
[music].
