3.2. Cross-Price Elasticity of Demand

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En provenance du cours de University of Illinois at Urbana-Champaign

Microeconomics Principles

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University of Illinois at Urbana-Champaign

Microeconomics Principles

613 notes

This course offers an introduction to the functions of individual decision-makers—both consumers and producers—within the larger economic system. Emphasis is on the nature and functions of product markets, the theory of the firm under varying conditions of competition and monopoly, and the role of government in promoting efficiency in the economy. Most people make the incorrect assumption that economics is ONLY the study of money. My primary goal in this course is to shatter this belief. During this course, we will be addressing the above questions as well as many more relating to: -the environment -love and marriage -crime -labor markets -education -politics -sports -business My main goal is to show you the way economists think and how to use this analytical system to answer questions related not only to these and other important human issues, but to anything you end up doing with your life after this class. After all, as you will quickly find out, I believe that everything is economics!

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Elasticities

Welcome to the fourth week! This module we will cover one of my favorite economics concepts: elasticity. It is one of my favorites because of how useful it is to analyze policy implications, as well as its usefulness for business managers. This will be obvious to you when you read one of the discussion topics for this module: Should we legalize marijuana?

3.1. Income Elasticity of Demand5:38

3.2. Cross-Price Elasticity of Demand8:04

Rencontrer les enseignants

Dr. José J. Vázquez-Cognet
Clinical Professor
Department of Economics

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].

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