Introduction/Possible Activities:

Previous lessons on elasticity have focused solely on how sensitive buyers are to the price of a good. Buyers are sensitive to two other things economists are interested in--the prices of other goods as well as changes to their income. This section and the next look at two additional types of elasticity, cross-price and income, to look at how buyers respond to changes to these other conditions. As we broaden our concept of elasticity to "buyer sensitivity" you should notice the connection between the foundations of the Law of Demand, the determinants of demand, and the elasticities studied here.

To that end...
Foundation of the Law of Demand
Related Shift Factor
Corresponding Elasticity
Marginal Utility
Price Elasticity
Substitution Effect
Cross-Price Elasticity
Income Effect
Income of Buyers (Normal/Inferior Goods)
Income Elasticity

This lesson will focus on Cross-Price Elasticity. It will explain what it is, how to calculate it, and how to interpret the results. In general, we use cross-price elasticity to determine whether or not goods are being treated as compliments or substitutes. Although it's often obvious from a logical perspective, sometimes the relationship between goods is not as clear, and scrutiny of market data can reveal how these goods are related within society in general. You should find as you study this material that the concepts and calculations are very similar to price elasticity of demand. In fact, the most difficult part is correctly interpreting a scenario and choosing the correct method. The red flag you will look for that signals you to use cross-price elasticity is that you'll be looking at the relationship between the price of one good and the quantity of another whereas with price elasticity of demand the relationship is between the price of a good and it's own sales.

II. Students should understand how a market economy determines prices and the role prices place in rationing scarce goods and services.
A. Students should be able to demonstrate understanding of elasticity by:
1. Defining elasticity of demand.
2. Calculating elasticity using:
b. coefficient method
8. Defining & calculating cross elasticity.

Learning Activities:
1. Watch the video below and take notes.

2. Complete the following worksheet after having watched the video. Try from memory first before using your notes:

For your reference:


Remediation Checklist:
  • Re-read text.