Income Elasticity of Demand

Income Elasticity of Demand - Suppose that: M1 = $500 and...

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Unformatted text preview: Suppose that: M1 = $500 and Q1 = 100 M2 = $600 and Q2 = 150 Suppose that: M1 = $500 and Q1 = 100 M2 = $600 and Q2 = Calculation of Income Elasticity of Demand 150 Suppose that: M1 = $500 and Q1 = 100 M2 =$600andQ2 =150 When there are “big” percentage changes in income, then 1 demand”, sometimes one calculates an “arc income elasticity of 5 Wanalogous hen When there there are “big”the arc price demand”, analogousincome,one are “big” percentage changes in income, then sometimes then changes in to the arc Practical Note: “arcto percentage elasticity of demand. price calculates an income elasticity of sometimes one of demand. an “arc income elasticity of demand”, elasticity calculates analogous to the arc price elasticity of demand. do not differ across 15 Note: When prices are unchanged or markets, the one can calculate income elasticities of demand using Practical Note: data on expenditures, since Note: When prices are unchanged or do not differ across % change in expenditure = % change in quantity markets, the one can calculate income elasticities of demand using Practical Note: data on expenditures, since Note: When prices are unchanged or do not differ across markets, the one can calculate income elasticities of demand using data on expenditures, since % change in hange in expenditure = % change in quantity % c expenditure = % change in quantity Suppose in the above example that P = $2, so that we had the following information: M1 $ the and Q1 = $200 Suppose in the above example that P = that that $2, so that we had Suppose=in 500above example $2, so P =we had the following the = information: followingM$2500 $6001 and QM==$$300and Q2 = $300 information:$200 2 2 600 M1 = and Q = M1 = $500 and Q1 = $200 M2 = $600 and Q2 = $300 A. Calculating Price and Income Elasticities from a Linear Demand Equations. Demand Equation Price Elasticity of Demand and Income Elasticities from a Linear A. Calculating Price Demand Equation Price Elasticity of Demand Suppose that Qx = Price1and Income Elasticities M, where Py = $2 Equations. Calculating 6 - Px + 2 Py + .002 from Estimated Demand Price Elasticity elasticity of the d M = $2000. What that Qxpriceof1Demand Py + .002 M, where Py = $2 the = 6 - Px + 2 Suppose isPrice and Income Elasticities from ademand for Equation A. Calculating Linear Demand od X when Price Elasticity of What is the price elasticity of the demand for x = $1? and P = $2000. Demand M S X when Px=6-1Px+2Py+.002M, where Py=$2 and M = that the good uppose M =Q$2000. What is the price elasticity of $2000. What is for 1? and the demand x = $demand for good X when Px = $1? price elasticity of the Suppose that Qx = 6 - 1 Px + 2 Py + .002 M, where Py = $2 good X when Px = $1? Answer: Substituting Px = $1, Py = $2 and M = $2,000 in the Answer: Substituting Px $2 and M $2,000 in the demand equation mand equation gives Qx = 14.= $1, Py == $1, Py== $2 and M = $2,000 in the gAnswer: Substituting Px above,$1, Py = $2 and M = $2,000 in the ives Qx Answer: Substituting Px = = 14. From the definition om the definition above, gives Qx Qx = 14. demand equation gives = 14. demand equation From the definition above, From the definition above, . .. ote that Note that , so , so . . Note that , so . This way of calculating thecalculating the known as the "point" "point" This way of elasticity is elasticity is known as the This way of calculating the elasticity is known as the "point" elasticity formula, elasticity formula, since we are demand at is of demand asticity formula, since calculating the elasticity ofcalculating the elasticity of demand sThis waywe are calculating the elasticityknown the demand ince we are of calculating the elasticity a point along as the "point" at c the point along the demand curve. a point elasticityademand since we are calculating the elasticity of demand alongurve. formula, curve. at a point along the demand curve. Income Elasticity of Demand Suppose that Q = 6 - 1 Px + 2 Py + .002 M, where Px = $1 and Py = $2 and M is income (in dollars). What is the income elasticity of demand when M = $2000? Answer: Substituting Px = $1, Py = $2 and M = $2,000 in the demand equation gives Q = 14. From the definition of income elasticity of demand: Answer: Substituting Px = $1, Py = $2 and M = $2,000 in the demand equation gives Q = 14. From the definition of income elasticity of demand: . Note that so , © Bryan L. Boulier, 2010. All rights reserved. ...
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This note was uploaded on 02/17/2011 for the course ECON 101 taught by Professor Fon during the Spring '06 term at GWU.

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