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54 CHAPTER 2 DEMAND AND SUPPLY ANALYSIS

TABLE 2.7 Price, Cross-Price, and Income and a decrease in the price of one brand would
Elasticities of Demand for Coca-Cola and Pepsi hurt demand for the other. In addition, the de-
mand for both products goes up when consumer
Elasticity Coca-Cola Pepsi
income goes up, indicating that increases in con-
Price elasticity of demand –1.47 –1.55 sumer incomes benefit both brands. Finally, the
Cross-price elasticity of demand 0.52 0.64 price elasticity of demand for each brand falls in
Income elasticity of demand 0.58 1.38 the range between 1 and q. Thus, the brand-
level demand for both Coke and Pepsi is elastic.

will decrease the demand for Pepsi, and a decrease
in Pepsi’s price will decrease the demand for Coke.
Thus, consumers view these products as substitutes,

PRICE ELASTICITY OF SUPPLY

s
price elasticity of The price elasticity of supply measures the sensitivity of quantity supplied Q to
supply The percentage price. The price elasticity of supply––denoted by Q s , ––tells us the percentage
P
change in quantity supplied change in quantity supplied for each percent change in price:
for each percent change in
price, holding all other
¢Q s
determinants of supply Q s 100%
constant. Q , P ¢P
s
P 100%
s
¢Q P
s
¢P Q
This formula applies to both the firm level and the market level. The firm-level
price elasticity of supply tells us the sensitivity of an individual firm’s supply to price,
while the market-level price elasticity of supply tells us the sensitivity of market
supply to price.

2.4 GREATER ELASTICITY IN THE LONG RUN
ELASTICITY THAN IN THE SHORT RUN
IN THE LONG Consumers cannot always adjust their purchasing decisions instantly in response to a
change in price. For example, a consumer faced with an increase in the price of natural
RUN VERSUS gas can, in the short run, turn down the thermostat, which will reduce consumption.
THE SHORT But over time, this consumer can reduce natural gas consumption even more by replac-
RUN ing the old furnace with an energy-efficient model. Thus, it is useful to distinguish
between the long-run demand curve for a product––the demand curve that pertains
to the period of time in which consumers can fully adjust their purchase decisions to
long-run demand changes in price––and the short-run demand curve—the demand curve that pertains
curve The demand curve to the period of time in which consumers cannot fully adjust their purchasing decisions
that pertains to the period to changes in price. We would expect that for products, such as natural gas, for which
of time in which consumers
can fully adjust their pur- consumption is tied to physical assets whose stocks change slowly, long-run demand
chase decisions to changes would be more price elastic than short-run demand. Figure 2.17 illustrates this possi-
in price. bility. The long-run demand curve is “flatter” than the short-run demand curve.