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Econ: What is Income Elasticity? 14 Views


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00:00

and finance Allah shmoop What is income Elasticity All right

00:07

people when you get a pay raise you feel like

00:10

you're on top of the world King of a fatter

00:13

wallet With all that dough you're starting to feel more

00:15

flexible Income elasticity also known as income Elasticity of demand

00:21

is a way to measure how changes an income change

00:23

Consumer demand like incoming elasticity is calculated by taking the

00:28

percent change in demand Numinous old over old and dividing

00:32

it by the percent change in income Yeah that's what

00:35

it looks like So back to that pay raise of

00:37

yours as income rises while we can expect to see

00:40

the demand for normal goods to rise Actually that's kind

00:43

of the definition of normal goods like normal goods aren't

00:46

things you normally buy right there Just goods you want

00:50

more of when you have more money in your pocket

00:53

A normal good for you might be gourmet coffee I

00:56

gotta love that For your sister a normal good might

00:59

be more quality fashionable clothes with intentional holes ripped in

01:04

them for your weird uncle Well more income might mean

01:07

artistic statues in his backyard Yeah to each his own

01:11

But as long as you start demanding more of a

01:13

good in response to more money to pay for it

01:15

you then have a positive income elasticity for that good

01:19

which means it's a normal good For instance let's say

01:22

you got a ten percent raise which caused you to

01:24

buy five percent more coffee Well that would mean five

01:27

percent increase in demand divided by ten percent increase in

01:29

income or a positive income Elasticity of demand of a

01:33

positive point five Yeah we can smell the freshly ground

01:36

Kona right now Well let's say that a month later

01:39

your boss said psych no raise for you Bummer Well

01:43

we'd simply switch the signs It's negative five percent then

01:46

divided by that negative ten percent Ten It's still equals

01:49

a positive zero point five incoming elasticity on a graph

01:53

where quantity demand it is on the X axis right

01:56

there and income is on the Y axis well normal

01:59

goods r sloping upward The more money we have the

02:02

more of that normal good will want to buy And

02:04

the opposite of normal goods are in theory your goods

02:08

which our goods that have a negative income elasticity like

02:11

inferior goods or goods You can live without my goods

02:14

You demand less as income rises It may or may

02:17

not be true for you but for many people fast

02:20

food is an inferior good right Not because it's made

02:23

out of chicken parts in the intestine and pig hooves

02:26

but because it has negative incoming elasticity Like remember when

02:30

your boss took back that pay raise will it meant

02:33

less gourmet Kona coffee a normal good and mohr fastfood

02:37

coffee and inferior good Well the initial ten percent pay

02:40

raise had led to an eight percent decrease in your

02:43

consumption of watery Mickey D's coffee So then you calculate

02:48

the net number to you as a negative eight percent

02:51

They're divided by a positive ten percent so that gives

02:54

you a negative zero point eight income elasticity When your

02:58

boss took back to pay raise grumble grumble your income

03:01

went down and consumption of bitter burn fast food coffee

03:04

went back up positive Eight percent divided by negative ten

03:08

percent is negative point eight Okay well on the graph

03:11

inferior goods or downward sloping The more money we have

03:14

the less you know french fries that we really want

03:16

to buy What about goods you buy the same amount

03:19

of no matter what your income like things like water

03:22

and toilet paper Well on the graph If the queue

03:24

stays the same regardless of a change in income than

03:27

the curve for that good would be a straight line

03:30

upward Twenty percent raise ten percent pay cut Doesn't matter

03:34

Still the same amount of toilet paper demanded That makes

03:36

our percent change in demand on top zero since well

03:40

there was no change if you went from buying one

03:42

bundle of TP before a raise and one bundle of

03:45

TP after a raise Yeah it's a change of zero

03:48

and zero divided by anything in California and any other

03:50

state in the nation is zero Which makes sense since

03:53

the line is vertical But hey what about luxury goods

03:56

Well as it turns out luxury goods or just a

03:58

type of normal good except more expense usually a luxury

04:02

good is a normal good because it has a positive

04:04

income elasticity What makes it different Well it has to

04:07

have an incoming elasticity greater than one For example let's

04:11

say a ten percent increase in your weird uncles income

04:13

resulted in a twenty percent increase in demand for his

04:16

weird yard art In our formula that would mean positive

04:20

Twenty percent is on top and positive Ten percent is

04:22

on the bottom for an income elasticity of two Well

04:25

think about what an incoming elasticity of at least one

04:29

means Your increase in demand for good must be the

04:32

same as the increase in your income or greater What

04:35

makes luxury goods luxury is being able to afford to

04:38

buy more of something than the proportion of your increase

04:42

in income Well there are a lot of things you'd

04:44

rather by then those odd things your uncle is decorating

04:47

his yard with but well different strokes for different folks

04:50

As they say luxury is in the eye of the 00:04:52.965 --> [endTime] consumer here

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