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Economics Lecture Five (view source)

Revision as of 14:21, October 5, 2009

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→‎Cross Elasticity: done

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:<math>Xed = \frac{% \Delta (Quantity-demanded-of-good-Y)}{% \Delta (Price-change-in-good-X)}</math>

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'''''Note that cross elasticity is different from price elasticity in that cross elasticity is comparing the change in demand for one good in response to the change in price of another good'''''.

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If the two goods (X and Y) are complements, then the cross elasticity is negative just as the price elasticity of a good is. Ketchup is a complement for french fries, and if the price of french fries increases, then people will eat fewer french fries and less ketchup. Hence the demand for ketchup will decrease and its cross elasticity with respect to french fries is negative.

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If the two goods (X and Y) are substitutes, then the cross elasticity is positive. Potato chips are a substitute for french fries, and if the price of french fries increases, then people will eat less french fries and more potato chips. Hence the demand for potato chips will increase and its cross elasticity with respect to french fries is positive.

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Expect a question on an exam which provides two goods and asks whether their cross elasticity is positive or negative. The correct answer will depend on whether the goods are complements (then the answer is "negative") or substitutes (then the answer is "positive").

=== Supply Elasticity ===

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