I n t h I s c h a p t e r y o u w I l L


cross- price elasticity of demand



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[N. Gregory(N. Gregory Mankiw) Mankiw] Principles (BookFi)

cross-
price elasticity of demand
to measure how the quantity demanded of one good
changes as the price of another good changes. It is calculated as the percentage
change in quantity demanded of good 1 divided by the percentage change in the
price of good 2. That is,
Cross-price elasticity of demand 
.
Whether the cross-price elasticity is a positive or negative number depends on
whether the two goods are substitutes or complements. As we discussed in Chap-
ter 4, substitutes are goods that are typically used in place of one another, such as
hamburgers and hot dogs. An increase in hot dog prices induces people to grill
hamburgers instead. Because the price of hot dogs and the quantity of hamburgers
demanded move in the same direction, the cross-price elasticity is positive. Con-
versely, complements are goods that are typically used together, such as comput-
ers and software. In this case, the cross-price elasticity is negative, indicating that
an increase in the price of computers reduces the quantity of software demanded.
Q U I C K Q U I Z :
Define the 
price elasticity of demand.

Explain the 
relationship between total revenue and the price elasticity of demand.
T H E E L A S T I C I T Y O F S U P P LY
When we discussed the determinants of supply in Chapter 4, we noted that sellers
of a good increase the quantity supplied when the price of the good rises, when
their input prices fall, or when their technology improves. To turn from qualita-
tive to quantitative statements about supply, we once again use the concept of
elasticity.
T H E P R I C E E L A S T I C I T Y O F S U P P LY
A N D I T S D E T E R M I N A N T S
The law of supply states that higher prices raise the quantity supplied. The 
price
elasticity of supply
measures how much the quantity supplied responds to
changes in the price. Supply of a good is said to be 
elastic
if the quantity supplied
Percentage change in quantity
demanded of good 1
Percentage change in 
the price of good 2
c r o s s - p r i c e e l a s t i c i t y o f
d e m a n d
a measure of how much the quantity
demanded of one good responds to a
change in the price of another good,
computed as the percentage change
in quantity demanded of the first
good divided by the percentage
change in the price of the second
good
p r i c e e l a s t i c i t y o f s u p p l y
a measure of how much the quantity
supplied of a good responds to a
change in the price of that good,
computed as the percentage change
in quantity supplied divided by the
percentage change in price


C H A P T E R 5
E L A S T I C I T Y A N D I T S A P P L I C AT I O N
1 0 5
responds substantially to changes in the price. Supply is said to be 
inelastic
if the
quantity supplied responds only slightly to changes in the price.
The price elasticity of supply depends on the flexibility of sellers to change the
amount of the good they produce. For example, beachfront land has an inelastic
supply because it is almost impossible to produce more of it. By contrast, manu-
factured goods, such as books, cars, and televisions, have elastic supplies because
the firms that produce them can run their factories longer in response to a higher
price.
In most markets, a key determinant of the price elasticity of supply is the time
period being considered. Supply is usually more elastic in the long run than in the
short run. Over short periods of time, firms cannot easily change the size of their
factories to make more or less of a good. Thus, in the short run, the quantity sup-
plied is not very responsive to the price. By contrast, over longer periods, firms can
build new factories or close old ones. In addition, new firms can enter a market,
and old firms can shut down. Thus, in the long run, the quantity supplied can re-
spond substantially to the price.
C O M P U T I N G T H E P R I C E E L A S T I C I T Y O F S U P P LY
Now that we have some idea about what the price elasticity of supply is, let’s be
more precise. Economists compute the price elasticity of supply as the percentage
change in the quantity supplied divided by the percentage change in the price.
That is,
Price elasticity of supply 
.
For example, suppose that an increase in the price of milk from $2.85 to $3.15 a gal-
lon raises the amount that dairy farmers produce from 9,000 to 11,000 gallons per
month. Using the midpoint method, we calculate the percentage change in price as
Percentage change in price 
(3.15 
2.85)/3.00 
100 
10 percent.
Similarly, we calculate the percentage change in quantity supplied as
Percentage change in quantity supplied 
(11,000 
9,000)/10,000 
100
20 percent.
In this case, the price elasticity of supply is
Price elasticity of supply 
2.0.
In this example, the elasticity of 2 reflects the fact that the quantity supplied moves
proportionately twice as much as the price.
T H E VA R I E T Y O F S U P P LY C U R V E S
Because the price elasticity of supply measures the responsiveness of quantity sup-
plied to the price, it is reflected in the appearance of the supply curve. Figure 5-6
shows five cases. In the extreme case of a zero elasticity, supply is 

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