480 section 9 Behind the Demand Curve: Consumer Choice
An Elasticity Menagerie
Name Possible values SignificancePrice elasticity of demand =% change in quantity demanded
% change in price
Perfectly inelastic demand 0 Price has no effect on quantity demanded
(vertical demand curve).
Inelastic demand Between 0 and 1 A rise in price increases total revenue.
Unit - elastic demand Exactly 1 Changes in price have no effect on total
revenue.
Elastic demand Greater than 1, A rise in price reduces total revenue.
less than ∞
Perfectly elastic demand ∞ A rise in price causes quantity demanded to
fall to 0. A fall in price leads to an infinite
quantity demanded (horizontal demand curve).Cross - price elasticity of demand =
% change in quantity of one gooddemanded
% change in price of another good
Complements Negative Quantity demanded of one good falls when
the price of another rises.Substitutes Positive Quantity demanded of one good rises when
the price of another rises.Income elasticity of demand =% change in quantity demanded
% change in income
Inferior good Negative Quantity demanded falls when income rises.
Normal good, income - inelastic Positive, Quantity demanded rises when income rises,
less than 1 but not as rapidly as income.
Normal good, income - elastic Greater than 1 Quantity demanded rises when income rises,
and more rapidly than income.Price elasticity of supply =
% change in quantity supplied
% change in price
Perfectly inelastic supply 0 Price has no effect on quantity supplied
(vertical supply curve).
Greater than 0, Ordinary upward - sloping supply curve.
less than ∞
Perfectly elastic supply ∞ Any fall in price causes quantity supplied to
fall to 0. Any rise in price elicits an infinite
quantity supplied (horizontal supply curve).table48.1
(dropping the minus sign)Module 48 AP Review
Check Your Understanding
- After Chelsea’s income increased from $12,000 to $18,000 a
year, her purchases of CDs increased from 10 to 40 CDs a year.
Calculate Chelsea’s income elasticity of demand for CDs using
the midpoint method.
2. As the price of margarine rises by 20%, a manufacturer of baked
goods increases its quantity of butter demanded by 5%.
Calculate the cross-price elasticity of demand between butter
and margarine. Are butter and margarine substitutes or
complements for this manufacturer?
Solutions appear at the back of the book.