Okay I'm hoping you guys are feeling
pretty comfortable, especially with price
elasticity of demand.  I want to introduce
you to three other common elasticities
that you'll run into,  and we'll go ahead
and we'll call this chapter 6 part 3.
We're going to cover price elasticity of
supply, income elasticity, and cross price
elasticity.  Alright let's take a look at
the price elasticity of supply... just like
the price elasticity of demand was
interested in how responsive consumers
were to a change in prices... the price
elasticity of supply is going to be
interested in how responsive producers
are to a change in prices.  Our ranges are
going to be essentially identical.  If you
calculate Es and it comes out to be
greater than one,  it's going to be
elastic. If it's between zero and one,  it's
going to be inelastic,  and if it's equal
to 1, it is unitary.  So the ranges are
exactly the same as Ed.   When you're
thinking about calculating it the only
difference is that we're now talking
about a percentage change in quantity
supplied with respect to a percentage
change in price. But it's going to be the
same exact thing use the midpoint
convention to calculate the top and use
it to calculate the bottom.... and of course
absolute value won't matter,  because the
supply curve is positively sloped.... so
whenever price goes up,  Qs should be
going up...always with a positive,  right?...
and similarly price goes down,  quantity
supplied goes down... negative over a
negative will also give you a positive.
In any event, what is going to influence
whether or not firms have an elastic
response or they have an inelastic
response???  First thing that's obvious is
how able are they to bump up production...
if they have a bunch of excess capacity
they're not running all of their factory
at full speed or full tilt,  and it's
pretty easy for them to respond
and actually bump up production.  If
prices rise it's also easy for them to
pump up production if it's relatively
easy to get inputs or to move factors
like land, labor, and capital towards them
when they need them.  If those things are
relatively inaccessible, then of course
you're going to expect a more
inelastic response.   If they have
available inventories... there's nothing
easier than just releasing inventories
to increase the quantity supply.  High
levels of inventory would seem to
suggest a high Es, or an elastic response. 
Length and complexity however are going
to suggest lower Es,  right??  If in fact
it's a very very lengthy and complex
process to produce your product, like a
Boeing jet.  It doesn't matter if
prices rise overnight,  you're not going
to be able to get a jet out the door for
months; hence, you're going to have a
relatively inelastic response....and so
these three: if you have excess capacity,
inventories, and high mobility of factors
these are all going to suggest
relatively elastic responses.  This last
one, however, length and complexity,  seems
to suggest that you'll get relatively
inelastic response.  Okay so there's just
a few determinants that you can think
about in terms of what makes firms more
or less likely to have elastic or
inelastic responses.  Alright let's take a
look at another elasticity,  income
elasticity.  Income elasticity is simply
asking about the percentage change in
quantity demanded with respect to a
change in income.  Now what's really going
on here is, for a given price, we're
asking what happens to quantity when
income changes.  Well when income changes
assuming it's a normal good... you're going
to see that there is an increase in
demand.... and at that same exact price we
are now going to see the
there is a larger quantity demanded than
there used to be.  This change in quantity
here is the one that we're talking about
here.   I don't want you to think that
we're moving along a demand curve.   We're
actually seeing a change in quantity
demanded based on a shift. So if you go
through and you calculate your number
from this... and you get a positive number..
you are going to know that what you are
dealing with is a normal good, because of
course, increase your income and you
increase quantity demanded-- that's normal...
or a decrease in your income and you
decrease quantity demanded.  Both of these
are going to generate positive numbers,
so you know you've got a normal good if
you get a value greater than zero.  If you
in fact get a value greater than one...
they often refer to this as a luxury good.
Okay, still a normal good.. but they're
going to tell you that it's a luxury
good,  because it is income-elastic. In
other words it tends to be quite
sensitive to changes in income.  If you
get a number between 0 and 1,  it's normal
but there usually are going to refer to
these as necessities or income-in elastic
because it's not particularly
sensitive to changes in income.  Our other
scenario that we haven't discussed yet
is when you end up with an income
elasticity that's less than 0, an actual
negative number.... and do not take the
absolute value.  In this case that will
mess everything up.
This particular elasticity you've got to
leave positives and negatives, because of
course negative it's going to mean that
you have an inferior good,  because what
you've got going on here is when you
increase income they actually requested
less of the object... or alternatively when
you decrease their income they actually
asked for more.... this is the kind of
relationship that will produce a
negative number,  and of course this is
how we define inferior
goods.  So harkening back to chapter three, 
when we were learning about our shifts,
this is how we would figure out whether
or not you have a normal or an inferior
good.   They're going to go out..they're
going to look at the data... they're going
to crunch the numbers....if it comes out
with a negative income elasticity, then it's
going to be classified as an inferior
good.
And our last elasticity that we're going
to examine today is cross price, and
you'll see this abbreviated Eab or
occasionally you'll see it denoted Exy.
It's not really standard, either one of
them would work... and what we're thinking
about here is that we want to know how
responsive the change in quantity
demanded of A is going to be to the
percentage change in price of good B. So
you might be asking about how responsive
is the quantity demanded for lemons when
we increase the price of limes,  or how
responsive is the quantity demanded for
bacon when we see a decrease in the
price of eggs.   You could look at either
of these sorts of things, and I hope
you're recognizing from my example so
far,  that this is how we're going to tell
whether or not the we are dealing with
substitutes or we are dealing with
complements.  If you go ahead and you
calculate these numbers out, once again
using your midpoint convention, and you
end up with a positive number... you know
that you are dealing with a substitute,
because when the price rose you actually
are going to see that there is an
increase in quantity demanded for the
other good... which would imply that
they're substituting away from the now
more relatively more expensive good
towards the other good--- similarly, if the
price drops and all of a sudden people
move away from the other good... you would
assume that they're going after the now
relatively cheaper.... both of these once
again are going to produce positive
numbers.   If you get a negative number, you're
dealing with a complement.
This would be like our bacon and eggs
example.  If in fact, bacon gets more
expensive,  then we would expect to see
that there is going to be a drop in
quantity demanded for eggs... and vice
versa, if bacon gets cheap people are going
to want to buy more eggs. 
Both of these are going to produce
negative numbers in the cross price
elasticity and this is how we know that
we are dealing with a complement. 
One other thing to add to this is just like
in our last slide on income elasticity
what we've got going on here is a shift
in the demand curve.  So at any given
price, we are asking based on a change in
the price of some other good (right?)...
not the good in question... some other good....
what is that going to do to the demand
for our good in question.   So for our
bacon and eggs example,  if in fact the
price of bacon were to decline, then
bacon is cheaper --probably going to buy
some more bacon-- and in our eggs market
we're going to see that there's an
overall increase in demand for eggs,  so
of course, we're going to see a higher Qd
for eggs.....not moving along a curve these
are changes in quantity caused by a
shift.  Hopefully that helps you keep
things straight.  Ok let's do another one
of these "now you try".  So which of the
following producers would you expect to
support a tax on skydiving and why??
Got ..Bungee jumping Outfitters and the data
suggest that they have a cross price
elasticity or four-point-two,  and you
have nylon harness makers and they have
a cross price elasticity which is
negative two point three.   Go ahead
and pause the video, take some time,
figure out what your answer is going to
be, and in the next slide I'll kind of walk
you through a solution.
okay let's go ahead and talk our way
through this.
We had bungee jumpers and their cross
price elasticity was 4.2, and we had
our harness makers and they had a cross
price elasticity of 2.3,  but it is
negative.  What does this really mean?  I
want you to remember that we're talking
about the percentage change in quantity
demanded over the percentage change in
price of the other good, in this case
skydiving.  So in order to work through
this you've got to understand a little
bit about what we learned in the chapter
on taxes.  If you impose a tax, then you would
expect that the price that's going to get
paid for skydiving is going to rise,  so
these cross price elasticities are going to
help you figure out how that rising
price in skydiving impacts bungee
jumping Outfitters here and harness
makers here.  So if they're Eab is four
point two.   I think it's easiest to just
turn it back into a fraction.  What this
means is that for every one percentage
increase in price for skydiving bungee
jumping folks are going to experience a
four point two percentage increase in
quantity demanded for bungee jumping.  Of
course this is a positive number and a
substitute, so when you think about it
bungee jumping Outfitters are delighted
if there's a tax on skydiving, because it
drives more business to them.  Harness
makers, on the other hand, feel a little
bit differently about this.  When you're
out there skydiving they often use nylon
harnesses... and they're going to use this
for tandem jumps,  and strapping you into
parachutes,  the whole nine yards.... of
course what I'm getting at here is that
harnesses are a complement and that is
evident by the number here, because for
every one percentage increase in the
price of skydiving harness makers
actually lose 2.3 percent in quantity
demanded.  This of course implies that
they are a complement.
So harness makers are going to be
adamantly opposed to at tax on
skydiving, because it's likely to cost
them money and customers.  Bungee-jumping
folks would be gleefully happy about
taxing skydiving, because it's going to
drive more and more people to bungee
jumping when they're looking for their
adrenaline fix.  Hopefully that helps you
to see how these sort of things can be
useful for understanding economic
behavior.
