2. The demand curve is the relationship between the amount of a product that people are willing to buy and the price of the product. An Engel curve is the relationship between the amount of a product that people are willing to buy and their income. An Engel curve is shown below.
3. The text discusses four types of elasticity: price elasticity of demand, price elasticity of supply, income elasticity of demand, and cross-price elasticity. (There are many others possible--wherever there is a stimulus-response pattern that can be measured, there is a possible elasticity.) In the following hypothetical cases, identify the stimulus and the response, and then decide what type of elasticity is being described.
a) The price of gasoline rises 50% and the sale of cars drops by 10%.
b) The income of Chinese workers rises by 50% and their purchases of new cars rise by 40%.
c) The price of gasoline rises by 50% and people buy 20% less.
d) The price of gasoline rises by 50% and gasoline production rises by 10%
e) Bread and butter are complements because a 10% increase in the price of butter reduces the sales of bread by 2%
f) Shoe repair is an inferior good because as income goes up by 20%, the numbers of shoes repaired goes down by 1%.
g) A 5% rise in the price of cotton causes farmers to plant 10% more acres in cotton.
h) A 10% rise in the price of gasoline reduces the amount people buy only 1% in the short run but by 8% in the long run.
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