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EC 1
UCLA
Dr. Bresnock
Lecture 5
Elasticity (cont.)
Income Elasticity
– measures the responsiveness of the % change in quantity demanded (Q
D
) (or
quantity supplied (Q
S
)) relative to a % change in income (I). We will focus on the income elasticity
with respect to demand in our examples.
Income Elasticity Formula
– Let
E
I
represent the income elasticity coefficient.
I
1
and
I
2
represent
two different incomes, and
Q
1
and
Q
2
represent the quantities demanded associated with those
incomes.
E
I
=
%
∆
Q
(Note
:
If the quantity used in the numerator is
Q
D
, then this formula
%
∆
I
will calculate the income elasticity of demand
.
If the quantity
used in the numerator is
Q
S,
then this formula will calculate
the income elasticity of supply
.)
Q
2

Q
1
Q
2
+ Q
1
2
E
I
=
I
2

I
1
I
2
+ I
1
2
Note
:
Income elasticities of demand will have a minus sign prior to conversion to absolute value
because of the inverse relationship between quantity demanded and income for some goods.
A
negative
sign on an income elasticity signifies that the good is an inferior good
.
Income elasticities of
demand will be positive due to the direct relationship between quantity demanded and income for
some goods.
A positive
sign on an income elasticity signifies that the good is a superior/normal good
.
3 Elasticity Cases
1)
Elastic
– the percentage change in quantity demanded (or supplied) will exceed the percentage
change in income.
That is,
%
∆
Q
D
> %
∆
I
and
⎜
E
I
⎜
> 1
2)
Unit Elastic
– the percentage change in quantity demanded (or supplied) is equal to the
percentage change in income.
That is,
%
∆
Q
D
= %
∆
I
and
⎜
E
I
⎜
= 1
3)
Inelastic
– the percentage change in quantity demanded (or supplied) is less than the
percentage change in income.
That is,
%
∆
Q
D
< %
∆
I
and
⎜
E
I
⎜
< 1.
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View Full DocumentEC 1
Lecture 5
Dr. Bresnock
2
Graph 1:
Income Elasticity Extreme – Neutral Goods
Perfectly Inelastic
⎜
E
I
⎜
= 0
Ex.
Income Elasticity
:
Some Examples
Cross Price Elasticity
– measures the responsiveness of the % change in quantity demanded (Q
D
) for
one good relative to a % change in the price of another good
Cross Price Elasticity Formula
– Let
E
X,Y
represent the cross elasticity coefficient.
Let
P
1
Y
and
P
2
Y
represent two different prices of one good, and
Q
1
X
and
Q
2
X
represent the quantities demanded of
another good that are associated with those prices.
Let
X
and
Y
represent two different goods.
E
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 Winter '09
 BRESNOCK

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