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Okay, so now let's review another type of elasticity, that's in terms of income

Â elasticity. But another type of elasticity is the

Â price of other goods. Remember that the price of other goods was

Â one of the determinants that we had for, for demand.

Â So, again, we're not deviating for, from our typical elasticity equation originally

Â was, the percent of change in the quantity of x to a percent of change in the price

Â of x. And we do that and we want to evaluate

Â instead of price income. We change a p for i.

Â Now, we want to see, what is the effect of a change in a different price of other

Â good not the, the price of x. And we call it a cross price.

Â And what we're going to do. We're going to do, well.

Â We're still interested in the percent of change in the quantity of x.

Â But this is going to be as a result of a change in the price of a different good.

Â Not the price of x but the price some other good, which is y.

Â So this is the cross-price elasticity of demand.

Â How demand for something responds to a change in the price for something else.

Â So for instance, let's say that the price percentage change and the price of x is

Â equal to an increase of 10%. And let's say that this x and for this

Â particular example. This x is I don't know?

Â Let's say pizza. Right?

Â So that's the that's, I'm sorry. This is the price of y here.

Â So this is the, the, the price of pizza goes up and let's say that the interest,

Â that your interest is how that affects the consumption of x, say that y is pizza and

Â x is beer. All right.

Â So, now, I want to see how an increase in the price of Ppizza affects your

Â consumption of beer. Right?

Â Again we can have two, two situations. One situation is an increase in the price

Â of pizza reduces your consumption of beer, or an increase in the price of pizza

Â increases your consumption of beer. And whether it's going to be positive or

Â negative is related to how pizza and beer are related for you, or for most

Â consumers, in consumption. So, I usually use this one because it's

Â not a clear one, right? For me, pizza and beer are complements.

Â Meaning that if the only time, assuming, alright?

Â This is in the extreme. Well, let's say that the only time I

Â actually drink a beer is for in fact I actually drink it with pizza.

Â And if I cannot have pizza I don't drink beer, right?

Â So if that's the case, then if the price of pizza goes up it will be more difficult

Â for me to buy the two things together which is the way I want to consume them,

Â pizza and beer. And therefore I might decide, well, I

Â might instead eat a burger which I like to eat it with a soda instead of a pizza.

Â So when the price of pizza goes up, my consumption of beer goes down.

Â And when the price of pizza goes down, now I can buy even more pizzas and I need beer

Â to drink that so my consumption of beer goes up.

Â So if the increase in the price of y leads to an increase a decrease in the price a

Â change in y, then what you have, the result of this, will be a negative sign of

Â this cross-price elasticity, right? So this will be a negative sign.

Â And the relationship of those two goods are complements.

Â So, for any good that you consume together, when the price of one go up,

Â since you've seen both goods as 1 good for you.

Â When the price of one good go up, your consumption of that good goes down.

Â And when the price of that composite good goes down, the consumption go up.

Â Examples of complements, there's many examples.

Â I use pizza and beer, perhaps. You don't actually think pizza and beer

Â are complements. I think they are but other ones cream

Â cheese and bagels, right? Gasoline and cars.

Â What else? Hot dog buns and hot buns.

Â Peanut butter and jelly, right? So all those things, you like to consume

Â them together. Right?

Â Sugar and coffee. Right?

Â All those things. And when the price of one thing goes up.

Â You probably consume less of the other one, because you like them to consume

Â together. Another type of relationship that you can

Â have, is one in which an increase in the price of 1 thing leads to a increase in

Â the price of the other thing. So, let's say that you're talking about

Â roses. Let's say that the price of let's say

Â we're talking about flowers start with carnations.

Â Let's say the price of y again goes up by 10% and now y are carnations.

Â And you want to find out, carnations, you want to find out what is the effect of an

Â increase in the price of carnations. Not in the consumption of carnations but

Â in the consumption of roses. Right?

Â So if the price of carnation go up by 10%, what do you think will happen to your

Â consumption of roses? Well then you start to deal with the

Â relationship between carnations and roses. Do you like to, when you like to you know

Â you mess up with your girlfriend, and you want to buy them some flowers.

Â Do you usually like to buy carnations and roses?

Â Probably, not. If you have the roses, you're in pretty

Â good shape, right, if you want, your girlfriend like flowers, she probably

Â going to like roses, so you should probably give her roses.

Â But you go to the counter to pay and you see a sign that says carnations on sale

Â for you know, for $1 and you're paying $20 for every rose.

Â Well clearly you're going to say hey, well wait.

Â I can give my girlfriend 1 rose but I could give her 20 carnations, right.

Â So she might actually like them the same. She may not.

Â And usually she probably not, but you may actually be thinking that, that you can

Â switch to the carnations instead of the roses.

Â Because I think in general most people think of carnations and roses as

Â subsidies. If the, if, if the, you can they cannot,

Â they're not the same, but they serve kind of the same purpose.

Â So if the price of roses, or the price of carnations goes down, you may be tempted

Â to use some of the money you going to use for roses for carnations.

Â So in that case the price elasticity, this price of elasticity, which is a percent of

Â change in the quantity of x, roses over the percent of change in the price of y

Â roses, is probably going to be positive. An increase in the price of a decrease in

Â the price of rose, of carnations reduces your consumption of roses.

Â And an increase in the price of carnations increases your consumption of roses.

Â Right? So, in this case, if your price of

Â carnations goes up by 10%, your consumption of roses also go up by some

Â percent. I can say, 10%.

Â We call this goods again substitutes. And there's plenty of examples of that,

Â classic substitutes, butter and margarine, coffee and, and tea alcohol and marijuana,

Â right? And all the things that you can use one

Â thing instead of the other. The relationship between the price and the

Â consumption of the other thing is going to be one for, for substitute which is that

Â the price of one goes up, the consumption of the other one goes up, and price of one

Â goes down, the consumption of the other one goes down.

Â So that is all the elasticity's in terms of demand that we have to talk about in

Â this class. We still have to cover the price

Â elasticity of supply and then we're going to do an application of this elasticity

Â stuff when we when we talk about taxes. [music] Produced by OCE, Atlas Digital

Â Media, at the University of Illinois. Urbana-champaign.

Â [music].

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