Economics CUC –Form IV Updated September 2017 Go to lesson Class Text Educate men without God and you make them but clever devils. Arthur Wellesley DEVOTION & PRAYER RC Cards Your Name: Kerwin Alexander • Email Address: kerwinalexander@hotmail.com • Telephone Contact/Whatsapp: 378-6790 • Favourite Song: Made for This– Life Tree Kids • Which career you plan to pursue: Well? • Class Watchwords We Shall pass this way but once! M. Chuma CLASS RULES Listen attentively when others are speaking Open: Your Your Your to receive knowledge. to give love to help and serve others. Voice thoughts, concerns and ideas in a respectful manner Electronic devices should only be used if it pertains to classroom activities. YED The following information relates to the number of Cafeteria Meals demanded among the CUC Students • When income is $450 meals demanded is 4 • When income is $550 meals demanded is 7 a. Calculate the YED when income changes from $450 to $550 (3 marks) b. Describe the degree of YED found (1a.) above and what type of good it indicates Cafeteria meals may be (4 marks) YED CUCLAND has a brand new store selling cheap shoes. Let's again assume the economy is doing well and everyone's income rises by 30%. Because people have extra money and can afford nicer shoes, the quantity of cheap shoes demanded decreases by 10%. I. Find the YED? (3 marks) II. Interpret the YED found in (i.) (7 marks) Elasticity Responsiveness to Change 1. What do we call responsiveness to change in economics and what does it tell us? 2. By How much would buyers and sellers change their plans in response to changes in some factor(s) e.g. price of the good; income or price another good? Key Definitions ❑Elasticity refers the degree to which individuals, consumers or producers change their demand or the amount supplied in response to changes in price or income or some other relevant factor or ❑Elasticity is a measure of the responsiveness of one economic variable to another. Or ❑Elasticity is a measure of how much buyers and sellers respond to changes in market conditions. Elasticity Cross Elasticity of Demand See You Guys Next Time! 1. Come prepared for TEST next class on PED/YED/XED/PES May The Lord Bless and Keep You Until… Set Induction • Define and Explain ‘Cross elasticity of demand’ • Calculate Cross elasticity of demand • Identify key factors that affect the Cross elasticity of demand • Explain what is a substitute good and what is a complementary good of Responsiveness) Define the Term Elasticity (Measure Elasticity Concept Map Types of Elasticity Measures the Responsiveness of Price Elasticity of Demand Quantity demanded to a in P Income elasticity of demand Cross elasticity of demand Price elasticity of Supply Quantity demanded to a in I Quantity demanded to a in P of another good Quantity supplied to a in P Recall and Recap Briefly Think! Today we are going to examine the change in demand for a particular good not because of a change income or not even because of a change in the price of that good but because of a change in the price of ANOTHER GOOD – CROSS ELASTICITY OF DEMAND CROSS ELASTICITY OF DEMAND (XED) Walking into the SAM’S MINI MART Jabari observed: The Following Was Observed At SAM”S MINI MART : 1 2 3 4 Complementary Goods (Negative XED) Examples: ❑Cars and Petrol. ❑Shoes and Polish. ❑Samosa and Potato. ❑Computer Hardware and Computer Software. ❑Printer and Ink Cartridges. ❑Torch and Battery. ❑Pencils and Erasers. ❑Gaming Portals and DVD of Games. ❑Mobile Phones and Sim Cards. ❑Iron Ore and Cooking Coal. Substitute Goods (Positive XED) Examples: ❑Tea and coffee ❑Bus, taxi and car ❑Pizza Boys and Pizza Hut ❑Butter and margarine ❑Beer and Wine ❑McDonald's and Burger King. ❑Starbucks vs Dunkin'Donuts ❑KFC and Royal Castle ❑Bing Search and Google Search ❑Electric cars and gas cars ❑Private schools and public schools ❑Coca Cola and Pepsi. Substitute Goods (Positive XED) Recall and Recap Briefly – What Type of Good? – Price of Coffee Demand D D Quantity of Tea Demand Curve for Substitutes Demand Curve for Complements Interpreting XED : Now You Try!. Cross Elasticity of Demand E.G. 1 Price for Guava Jam Y Original New/Change Quantity Demanded/QD Butter/Week (33.3%) “X” $6 $12 6 8 ❑Cross Elasticity of Demand (XED) = Percentage Change in QD of good X/ Percentage Change Price of Good Y %∆𝑸𝑫𝒙 %∆𝑷y or ∆𝑸𝒙 𝑸𝒙 ÷ ∆𝑷𝒚 𝑷𝒚 Cross Elasticity of Demand E.G. 1 Original New/Change Price for Guava Jam Quantity Demanded/QD Butter/Week (33.3%) $6 $12 6 8 ❑Cross Elasticity of Demand (XED) = %∆𝑸𝑫𝒙 %∆𝑷y ∆𝑸𝒙 Or 𝑸𝒙 %∆𝑸𝑫𝒙 %∆𝑷y 𝑵𝒆𝒘 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙−𝑶𝒍𝒅 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙 𝟏𝟎𝟎 x = 𝑶𝒍𝒅 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙 𝟏 𝟖−𝟔 𝟏𝟎𝟎 = x 𝟔 𝟏 𝟐 𝟏𝟎𝟎 NOTE: “+33.3” indicates that quantity = x = 33.3 % 𝟔 𝟏 demand has increased ∴ %∆𝑸𝑫𝒙 = 33.3% ÷ ∆𝑷𝒚 𝑷𝒚 Cross Elasticity of Demand E.G. 1 Original New/Change Price for Guava Jam $6 $12 QD Butter/Week (33.3%) 6 8 ❑Cross Elasticity of Demand (XED) = %∆𝑸𝑫𝒙 %∆𝑷y %∆𝑸𝑫𝒙 %∆𝑷y 𝑵𝒆𝒘 𝑷𝒓𝒊𝒄𝒆 𝒚−𝑶𝒍𝒅 𝑷𝒓𝒊𝒄𝒆 𝒚 𝑶𝒍𝒅 𝑷𝒓𝒊𝒄𝒆 𝒚 x 𝟏𝟎𝟎 = 𝟏 = NOTE: “+100” indicates that Price has increased = 𝟏𝟎𝟎 x 𝟏 𝟔 𝟏𝟎𝟎 x = 100% 𝟔 𝟏 𝟏𝟐−𝟔 𝟔 ∴ %∆𝑷𝒚 = 100% ∆𝑸𝒙 Or 𝑸𝒙 ÷ ∆𝑷𝒚 𝑷𝒚 Cross Elasticity of Demand E.G. 1 Original New/Change Price for Guava Jam $6 $12 QD Butter/Week (33.3%) 6 8 ❑Cross Elasticity of Demand (XED) = %∆𝑸𝑫𝒙 %∆𝑷y %∆𝑸𝑫𝒙 𝟑𝟑. 𝟑𝟑% = %∆𝑷y 𝟏𝟎𝟎% = 𝟎. 𝟑𝟑 ∆𝑸𝒙 Or 𝑸𝒙 ÷ ∆𝑷𝒚 𝑷𝒚 Interpretation: A positive XED indicates that the goods are substitutes for each other where as the price of one of the goods increases the demand for the other would also increase. There is a positive or direct relationship (both price of y and QD of x moves in the same direction/increases) between the price for good y and the QD for good x when the goods are substitutes for each other : What If The Price Of The Good Decreases? Cross Elasticity of Demand E.G. 1 Original New/Change Price for Bread Quantity Demanded/QD Butter/Week (-10%) 10 9 $5 $6 Percentage Change in QD of good X/ Percentage Change Price of Good Y %∆𝑸𝑫𝒙 %∆𝑷y or ∆𝑸𝒙 𝑸𝒙 ÷ ∆𝑷𝒚 𝑷𝒚 Cross Elasticity of Demand E.G. 1 Original New/Change Price for Bread QD Butter/Week (33.3%) $5 $6 10 9 %∆𝑸𝑫𝒙 %∆𝑷y ∆𝑸𝒙 Or 𝑸𝒙 %∆𝑸𝑫𝒙 %∆𝑷y 𝑵𝒆𝒘 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙−𝑶𝒍𝒅 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙 𝟏𝟎𝟎 x = 𝑶𝒍𝒅 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙 𝟏 𝟗−𝟏𝟎 𝟏𝟎𝟎 NOTE: “-10” indicates that quantity = x 𝟏𝟎 𝟏 demand has decreased – thus we can −𝟏 𝟏𝟎𝟎 already see that XED for = x = -10 % 𝟏𝟎 𝟏 complementary goods are negative/causes demand to decrease ∴ %∆𝑸𝑫𝒙 = -10% ÷ ∆𝑷𝒚 𝑷𝒚 Cross Elasticity of Demand E.G. 1 Price for Bread Original New/Change QD Butter/Week (33.3%) $5 $6 10 9 %∆𝑸𝑫𝒙 %∆𝑷y %∆𝑸𝑫𝒙 %∆𝑷y 𝑵𝒆𝒘 𝑷𝒓𝒊𝒄𝒆 𝒚−𝑶𝒍𝒅 𝑷𝒓𝒊𝒄𝒆 𝒚 𝑶𝒍𝒅 𝑷𝒓𝒊𝒄𝒆 𝒚 x 𝟏𝟎𝟎 = 𝟏 = NOTE: “+20” indicates that Price has increased = 𝟔−𝟓 𝟏𝟎𝟎 x 𝟓 𝟏 𝟏 𝟏𝟎𝟎 x = 20% 𝟓 𝟏 ∴ %∆𝑷𝒚 = 20% ∆𝑸𝒙 Or 𝑸𝒙 ÷ ∆𝑷𝒚 𝑷𝒚 Cross Elasticity of Demand E.G. 1 Price for Bread Original New/Change %∆𝑸𝑫𝒙 %∆𝑷y −𝟏𝟎 = 𝟐𝟎% = −𝟎. 𝟓 QD Butter/Week (33.3%) $5 $6 10 9 %∆𝑸𝑫𝒙 %∆𝑷y ∆𝑸𝒙 Or 𝑸𝒙 ÷ ∆𝑷𝒚 𝑷𝒚 Interpretation: A negative XED indicates that the goods are complements for each other where as the price of one of the goods increases the demand for the other would decrease. There is a negative or indirect or inverse relationship (Price and QD moves in different directions: price increase but QD decreases) between the price for good y and the QD for good x when the goods are complementary Cross Elasticity of Demand %∆𝑸𝑫𝒙 %∆𝑷y Cross Elasticity of Demand E.G. 1 Price for Apple Original New/Change QD Pear $2 $2.50 30 50 %∆𝑸𝑫𝒙 %∆𝑷y %∆𝑸𝑫𝒙 %∆𝑷y ∆𝑸𝒙 Or 𝑸𝒙 𝑵𝒆𝒘 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙−𝑶𝒍𝒅 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙 𝟏𝟎𝟎 x = 𝑶𝒍𝒅 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅𝒙 𝟏 𝟓𝟎−𝟑𝟎 𝟏𝟎𝟎 = x 𝟑𝟎 𝟏 𝟐𝟎 𝟏𝟎𝟎 = x = 67% 𝟑𝟎 𝟏 ∴ %∆𝑸𝑫𝒙 = 67% ÷ ∆𝑷𝒚 𝑷𝒚 Cross Elasticity of Demand E.G. 1 Price for Apple Original New/Change QD Pear $2 $2.50 30 50 %∆𝑸𝑫𝒙 %∆𝑷y %∆𝑸𝑫𝒙 %∆𝑷y 𝑵𝒆𝒘 𝑷𝒓𝒊𝒄𝒆 𝒚−𝑶𝒍𝒅 𝑷𝒓𝒊𝒄𝒆 𝒚 𝑶𝒍𝒅 𝑷𝒓𝒊𝒄𝒆 𝒚 x 𝟏𝟎𝟎 = 𝟏 = NOTE: “+27” indicates that Price has increased = 𝟐.𝟓−𝟐 𝟏𝟎𝟎 x 𝟐 𝟏 .𝟓 𝟏𝟎𝟎 x = 25% 𝟐 𝟏 ∴ %∆𝑷𝒚 = 25% ∆𝑸𝒙 Or 𝑸𝒙 ÷ ∆𝑷𝒚 𝑷𝒚 Cross Elasticity of Demand E.G. 1 Price for Apple Original $2 $2.50 New/Change %∆𝑸𝑫𝒙 %∆𝑷y QD Pear 𝟔𝟕% = 𝟐𝟓% = 𝟐. 𝟕 30 50 %∆𝑸𝑫𝒙 %∆𝑷y ∆𝑸𝒙 Or 𝑸𝒙 ÷ ∆𝑷𝒚 𝑷𝒚 Why XED Matters The Cross elasticity of demand : ❑Companies utilize cross-elasticity of demand to establish prices to sell their goods. Products with no substitutes have the ability to be sold at higher prices because there is no cross-elasticity of demand to consider. However, incremental price changes to goods with substitutes are analyzed to determine the appropriate level of demand desired and the associated price of the good. Additionally, complementary goods are strategically priced based on cross-elasticity of demand. For example, printers may be sold at a loss with the understanding that the demand for future complementary goods, such as printer ink, should increase. Why XED Matters The Cross elasticity of demand tells you: ❑How your customers will react to a change in your product’s price. ❑It is a way to mathematically measure the amount you can increase an item’s price by before your sales revenue begins to fall. ❑Some products have a high XED. This means that your sales will decrease when you raise the selling price. Why? ❑Other products have a low cross elasticity of demand. This means that your sales are largely unaffected when you increase the product’s price. Why? ❑The cross elasticity of demand can help you find the optimal selling price for your products. Why XED Matters The Cross elasticity of demand also helps in the: ❑Classification of goods: Goods are classified into substitute and complementary. If cross elasticity of demand between any two goods is positive, the goods may be considered as substitute for each other. If the cross elasticity is greater, the good are closer substitute. If it is infinite, they are perfect substitute. If the cross elasticity of demand for any two related goods is negative, the two goods may be considered as complementary for each other. If the negative cross elasticity of demand is high, the degree of complementarily is also high. ❑Classification of Market: Market structure has been classified by prof. Bayn on the basis of cross elasticity of demand. If the cross elasticity of demand is infinite, the market is perfectly competitive. If the cross elasticity is zero or almost zero, the market structure is monopoly. If the cross elasticity is high there is imperfect market. Why XED Matters The Cross elasticity of demand also helps in the: ❑Pricing Policy; Large firms produce different related goods. For example Nepal Liver Limited produces various brands of tooth paste & tooth brush. They are complementary goods. Similarly, Nepal Dairy Limited produces ice-cream of different flavor. Cross elasticity of demand helps firms to decide whether to increase price of related products or not. ❑Determination of boundaries between industries; Concept of cross elasticity of demand is useful in order to decide to which product should include in which industry. If related goods having negative cross elasticity (complementary goods), they belong to different industries. If the related goods having positive cross elasticity (substitute goods), they belong to one industry. Why XED Matters ❑If the goods are substitutes or complements, the numerical value of the XED will be much larger than if the two goods bear little relation to each other; i.e. a change in the price of one good will have a significant impact on the demand for the other good. This will be important for business decision making. ❑For example, consider two manufacturers of different brands of beer (perhaps your teachers will take you on a field trip to test this?) Brand X and Brand Y, which are close substitutes for each other. The decision by the manufacturer of Brand X to lower price will, other things being equal, lead to an increase in the consumption of Brand X beer. If the manufacturer of Brand Y beer leaves the price unchanged, he is likely to experience a decrease in demand as Brand X will become relatively, and possibly absolutely, more expensive than Brand Y. The manufacturer of Brand X is faced with an important pricing decision in order to compete effectively with the rival. Why XED Matters ❑Conversely, consider the case of two goods which are complements, strawberries and cream. A good harvest will increase the supply of strawberries and lower their price. There will be a movement along the demand curve for strawberries, an extension of demand. Given that people like to pour cream on their strawberries to give extra taste, manufacturers of cream will have to make important output decisions if they are to meet the potential increase in demand for cream arising from higher consumption of strawberries : Recall and Recap Briefly Price of Coffee Demand D D Quantity of Tea Demand Curve for Substitutes Demand Curve for Complements Demand Schedule NOTE All determinants except price causes shifts in the demand curve. Its important not to confuse the terms “change in quantity demanded” which causes an extension or contraction in the demand curve/movement along the curve, versus a change in demand shown by a shift in the demand curve. Cross (X) Elasticity of Demand Cross elasticity of demand or XED measures how demand for one good (good A) changes in response to the price of another good or (good B) It looks at the proportionate change in demand for good A in response to changing price of another good (good) ceteris paribus. Some goods sell relatively better or worse than others when the price of another good changes, while some goods are not affected by the change in price of another good Cross (X) Elasticity of Demand Cross elasticity of demand or XED measures how demand for one good (good A) changes in response to the price of another good or (good B) Can You GIVE ANY EXAMPLES of goods that change in response to the change in price of another good in real life?