Principles of Economics- Mankiw (5th) 100

Principles of Economics- Mankiw (5th) 100 - 104 PA R T T W...

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104 PART TWO SUPPLY AND DEMAND I: HOW MARKETS WORK rides, are inferior goods: Higher income lowers the quantity demanded. Because quantity demanded and income move in opposite directions, inferior goods have negative income elasticities. Even among normal goods, income elasticities vary substantially in size. Ne- cessities, such as food and clothing, tend to have small income elasticities because consumers, regardless of how low their incomes, choose to buy some of these goods. Luxuries, such as caviar and furs, tend to have large income elasticities be- cause consumers feel that they can do without these goods altogether if their in- come is too low. The Cross-Price Elasticity of Demand Economists use the cross- price elasticity of demand to measure how the quantity demanded of one good changes as the price of another good changes. It is calculated as the percentage change in quantity demanded of good 1 divided by the percentage change in the price of good 2. That is, Cross-price elasticity of demand
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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