Group 3 - Elasticity in Areas Other Than Price

ELASTICITY IN
AREAS OTHER
THAN PRICE
GROUP 3
LEARNING OBJECTIVES
By the end of this section, you will be able to:
Calculate the income elasticity of demand and
the cross-price elasticity of demand
Calculate the elasticity in labor and financial
capital markets through an understanding of
the elasticity of labor supply and the elasticity
of savings
Apply concepts of price elasticity to real-world
situations
The basic idea of elasticity—how a percentage change in one
variable causes a percentage change in another variable—does
not just apply to the responsiveness of quantity supplied and
INTRODUCTION quantity demanded to changes in the price of a product. Recall

that quantity demanded (Qd) depends on income, tastes and
preferences, the prices of related goods, and so on, as well as
price. Similarly, quantity supplied (Qs) depends on factors such
as the cost of production, as well as price. We can measure
elasticity for any determinant of quantity supplied and quantity
demanded, not just the price.
Income Elasticity
of Demand
Proposed
The income elasticity of demand is positive = Normal Goods

The income elasticity of demand is negative = Inferior good
A higher level of A higher level of
income causes a income causes a
demand curve to demand curve to
shift to the right shift to the left
Cross-Price Elasticity
of Demand
Cross-price elasticity of demand refers to the idea that the

price of one good is affecting the quantity demanded of a
different good. Specifically, the cross-price elasticity of
demand is the percentage change in the quantity of good A
that is demanded as a result of a percentage change in the
price of good B.
Qd = Quantity Demand
If the cross-price elasticity of demand is positive, an
increase in the price of coffee leads to an increase in the
quantity demanded of tea, indicating that they are
substitutes.
If the cross-price elasticity is negative, an increase in the

price of creamer leads to a decrease in the quantity
demanded of coffee, indicating that they are complements.
Elasticity in
Labor Markets
Proposed
Elasticity of Labor Supply

-measures the extent to which labor supply responds to a
change in the wage rate.
Factors Affecting the Elasticity of Labor Supply
Skills
Education/training
Availability of labor
Time
Elastic Inelastic
Elasticity in Financial
Capital Markets
In financial capital, The supply curve for financial capital in markets is

shaped by the elasticity of savings, which is the percentage change in
savings divided by interest rate changes.
Tax breaks can increase savings quantity by increasing the return on

savings. If the supply curve for financial capital is elastic, a
percentage increase in return to savings leads to a higher quantity of
savings. However, if it's highly inelastic, a percentage increase in
return to savings only leads to a small increase.
If the government reduces the taxes on savings, thereby
increasing the return on savings, can incentivize individuals to
save more.
If the supply curve for financial capital is elastic, the expected

tax cut will result in a higher percentage increase in savings.
If the supply curve for financial capital is highly inelastic, the

percentage increase in return to savings will only result in a
small increase in savings quantity.
In the short-term elasticity of savings with respect to interest

rate generally appears to be fairly inelastic.
Expanding the Concept
of Elasticity
- Elasticity extends beyond typical supply and

demand curves.
- Elasticity terms (e.g., elasticity of demand,
elasticity of supply) can lead to confusion.
- Clarification: "Price elasticity of demand" or
"elasticity of demand with respect to price"
refers to demand elasticity concerning price.
- Similarly, "price elasticity of supply" or
"elasticity of supply with respect to price"
ensures clarity regarding supply elasticity.
- Elasticity always denotes the percentage
change in one variable (usually price or money)
causing a percentage change in another variable
(typically quantity)
THANK YOU!

Group 3 - Elasticity in Areas Other Than Price

Uploaded by

Copyright:

Available Formats

Group 3 - Elasticity in Areas Other Than Price

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Group 3 - Elasticity in Areas Other Than Price

Uploaded by

Copyright:

Available Formats

ELASTICITY IN

INTRODUCTION quantity demanded to changes in the price of a product. Recall

The income elasticity of demand is positive = Normal Goods

Cross-price elasticity of demand refers to the idea that the

If the cross-price elasticity is negative, an increase in the

Elasticity of Labor Supply

In financial capital, The supply curve for financial capital in markets is

Tax breaks can increase savings quantity by increasing the return on

If the supply curve for financial capital is elastic, the expected

If the supply curve for financial capital is highly inelastic, the

In the short-term elasticity of savings with respect to interest

- Elasticity extends beyond typical supply and

You might also like