Elasticity in Areas Other Than Price

Self-Check Questions

What would the gasoline price elasticity of supply mean to UPS or FedEx?

Hint:

The percentage change in quantity supplied as a result of a given percentage change in the price of gasoline.

The average annual income rises from $25,000 to $38,000, and the quantity of bread consumed in a year by the average person falls from 30 loaves to 22 loaves. What is the income elasticity of bread consumption? Is bread a normal or an inferior good?

Hint:

Percentage change in  quantity demanded=[(change in quantity)/(original quantity)] × 100=[22 – 30]/[(22 + 30)/2] × 100=–8/26 × 100=–30.77Percentage change in income=[(change in income)/(original income)] × 100=[38,000 – 25,000]/[(38,000 + 25,000)/2] × 100=13/31.5 × 100=41.27

In this example, bread is an inferior good because its consumption falls as income rises.

Suppose the cross-price elasticity of apples with respect to the price of oranges is 0.4, and the price of oranges falls by 3%. What will happen to the demand for apples?

Hint:

The formula for cross-price elasticity is % change in Qd for apples / % change in P of oranges. Multiplying both sides by % change in P of oranges yields:

% change in Qd for apples = cross-price elasticity X% change in P of oranges

= 0.4 × (–3%) = –1.2%, or a 1.2 % decrease in demand for apples.