Page 3: Income Elasticity, Cross Elasticity, and Supply

This page covers income elasticity of demand (YED), cross elasticity of demand (XED), and the concept of supply in microeconomics. These concepts are crucial for understanding market dynamics and consumer behavior.

The page begins by defining income elasticity of demand (YED) as the responsiveness of demand to changes in consumer income. It explains how YED can be used to classify goods:

• Normal goods: YED > 0
• Luxury goods: YED > 1
• Inferior goods: YED < 0

Example: Television sets are given as an example of a luxury good with YED > 1.

Cross elasticity of demand (XED) is introduced as the responsiveness of demand for one product to changes in the price of another product. The page explains how XED can be used to identify relationships between goods:

• Substitutes: Positive XED
• Complements: Negative XED
• Unrelated goods: XED = 0

Highlight: The strength of the relationship between goods can be determined by the magnitude of XED.

The concept of supply is defined as the quantity of goods or services that a firm is able and willing to supply at a given price during a specific period. The law of supply, which states that price and quantity supplied are in a direct relationship, is explained.

Definition: The law of supply states that there is a direct relationship between price and quantity supplied.

Factors causing shifts in supply are listed, including productivity, technology, indirect taxes, subsidies, number of firms, weather, and costs of production. The page emphasizes that changes in price cause movements along the supply curve, while changes in other factors cause shifts of the entire curve.

Vocabulary: Profit incentive is highlighted as a key factor in the upward slope of the supply curve.

Page 4: Price Elasticity of Supply

This final page focuses on the concept of price elasticity of supply (PES), an important aspect of microeconomic analysis. It provides a brief overview of PES and its implications for market dynamics.

The page defines price elasticity of supply (PES) as the responsiveness of quantity supplied to a change in price. It provides the formula for calculating PES:

PES = % Change in Quantity Supplied / % Change in Price

Definition: Price elasticity of supply (PES) measures how responsive the quantity supplied is to a change in price.

The page notes that PES is always likely to be positive, reflecting the direct relationship between price and quantity supplied as described by the law of supply.

Highlight: Unlike price elasticity of demand, which is typically negative, price elasticity of supply is usually positive due to the profit incentive for firms.

The concept of perfectly inelastic supply is briefly mentioned, where PES = 0. This represents a situation where supply remains constant regardless of price changes.

Example: While not explicitly stated in the text, an example of a good with perfectly inelastic supply in the short run might be tickets to a sold-out concert, where the quantity cannot be increased regardless of price increases.

Although the page is brief, it provides a foundation for understanding how supply responds to price changes, which is crucial for analyzing market behavior and predicting outcomes in various economic scenarios.