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L5 - EC 1 UCLA Dr Bresnock Lecture 5 Elasticity(cont Income...

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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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