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wfwn thf pr<e uses to percent. riectiK ity uve falfc roughly 3 petceo:. At the pump. a 10 percent retease In pike teach toadrclrrol anxnd 1 perrcr* m demand. [AtMtart »ot«' It would be mow ptecise to wy t*vit the p»Ke inc tease leads to a 2 pet-

cert dedme in quantity derm need, because the change rcpwnls a movement dc.cq the demand or* 1

Consumei Sehsva can change quickly In a ensn. A study by Petei C. Rem, a pro-fessoi of nrcoomrj at Stanford aid Matthew w white a ol business ar<J pubic policy at the rtKirton School ol the Unrrtisily of PemsybirrA picvrfci some iccirt evdrno? lis examrftg S»n Die^ hou«hckls during th<- Calftxnu e<e«>»: Ity crisis ol 2COO and 2001, they ford thit use ol ctcctrCRy chopped sutprftlngly last, in the summer of 2CC0. within (a d»y>

monthly electri: bill live by about StiO- an increase ci 150 percert the a.rr.vje hcuschakl cut is use cfelxtrfcHy by 12 peiccrt nut lind ofd«opi«wa'S a bijcMrge in behjver TheaKhanhxndthithojsehdds had turned off alt cor/ltiorrn :n the rn&fc of iwnmei and had insisted h new eneigy eCfceiit applunc«. among ottif thing*.

Hnh costs J rent lhe only toice thit wil Wijenrc consumers to cm twrl Although puWK «>peah, to v*k energy may be ikteufed by corneduro on bte-nu»it televrian («all I'trsdcrt Irranf Carter s flwdlgin sAT-aii'i—the rlfoits can hist- a substantiai hipact

Piofessois toss and Whte lixnd '.h* to brtme nSanOcgo In letxauy ."COI.wrh dect'k-ity p«« capped, the state d Calfor nil tie^in i campeijn to ha« househctos ccnseis«e dectncity. II wolfed. "It was cleai by ahaut SK months into «01 that ptiUt WpeaH wew h»vt»j a b>g tmpact.* Pioles-so' WM» Such campaiqns can icnficant eflects on consumer tw+uvcr, 1» s-irl, i ihey oSw a clear raphrvitlon of *tvit people can do ho* it *sli make a liitleiwce.

Perhaps the most mpaitant reason fai optimism is t«hnofcq/s mle n piwnotlng eretgr Hv'rvji rrom 1979 to 1985, in the altermMh d enrrqy steutayes. Americans rrdoced ther ol coniumptcn by 11 per cent, the single b«»?« Ucw w>as a shift n car bu^ng liabr» AmtriOM found that diitinc furi-effii.enl edis, rnteao of gis gur-rlffS, Eton"! stop them frcm Qring vihrrc theywacwdwgD

Even among normal goods, income elasticities vary substantially in size. Necessities, such as food and dothing, tend to have small income elasticities because consumers choose to buy »me of these goods even when their incomes are low. Luxuries, such as caviar and diamonds, tend to have large income elasticities because consumers feel that they can do without these- goods altogether if their incomes are too low.

Tho Cross-Prico Elasticity of Domand The cross-pricc elasticity of demand measures how the quantity demanded of one good responds to a change in the price of another good. It is calculated as the percentage change in quantity demanded of good I divided bv the percentage change in the price of good 2. That is,

C roan-price ebstieity of demand - quantity demanded of,pod 1

Percentage change in the price of good 2

Whether the cross-price elasticity is a positive or negative number depends on whether the two goods are substitutes or complements. As we discussed in Chapter 4, substitutes are goods that are typically used in place of one another, such as hamburgers and hot dogs An increase in hot dog prices induces people to grill hamburgers instead. Because the price of hot dogs and the quantity of hamburgers demanded move in the same direction, the cross-price elasticity is positive. Conversely, complements are goods that are typically used together, such as computers and software. In this case, the cross-price elasticity is negative, indicating that an increase in the price of computers reduces the quantity of software demanded.

cross-price elasticity of demand a measure of how much the quantity demanded of one good responds to a <h«ng» m the price of another good, computed «»the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

QUICK QUIZ Define the price elaitcity of demand. • Explain the relationship betuveen total revenue and the price elasticity of derri<vK).

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