income_e,_parkin - The income elasticity of demand is...

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Unformatted text preview: The income elasticity of demand is calculated by using the formula: ‘ I I Percentage change i Income elastic“? in quantity demanded - of demand = | Percentage change in income' Income elasticities of demand can be positive or negative and fall into three interesting ranges: I Greater than 1 (normal good, income elastic) H‘— I Positive and less than 1 (normal good, income inelastic) Pfl‘g N ‘ M t CH AQL I Negative (infin'or good) I in Income Elastic Demand Suppose that the price of N's/“)9; fly a) ‘ pizza is constant and 9 pizzas an hour are sold. Then incomes rise from $975 to'$1,025 a week. No other ‘ ‘ v , influence on buying plans changes and the quantity or] half“? Loos bl) I of pizzas sold increases to 11 an hour. t MCPTRCAJ i The Chan in the uanti demanded is +2 can . I C. at q tr pizzas. The average quantity is 10 pizzas, so the quan- tity demanded increases by 20 percent. The change in 1 income is +$50 and the average income is.$ 1,000, so } incomes increase by 5 percent. The income elasticity ‘ of demand for pizza is 20% 5% As income increases, the quantity of pizza demanded increases faster than income. The demand for pizza is income elastic. Other goods in this cate- \ gory include ocean cruises, international travel, jew— elry, and works of art. =4. 5 Income Inelastic Demand Ifthe percentage ‘I increase in the quantity demanded is less than the percentage increase in income, the income elasticity of demand‘is positive and less than 1. In this case, the quantity demanded increases as income increases, but Income EIaStIc'ty Of Demand income increases faster than the quantity demanded. Suppose the economy is expanding and people are The demand for the good is income inelastic. Goods enjoying rising incomes. This prosperity is bringing in this category include food, clothing, newspapers, _ an increase in the demand for most types of goods and magazines. and services. But by how much will the demand for , pizza increase? The answer depends on the income Inferior Goods If the quantity demanded ofa good elasticity Of demand. which is a measure of the decreases when income increases, the income elastic- responsiveness of the demand for a good or service ity of demand is negative. Goods in this category to a change in income, other things remaining 7 include small motorcycles, potatoes, and rice. Low— the same. income consumers buy most of these goods. - 3} _. _ rr-_-‘—- - ‘ """v-w—‘mrI-n'F-HW ' Real-World Income Elasticities of Demand Table 4.2 shows estimates of some real—world income elasticities of demand. The demand for a necessity such as Food or gasoline is income inelastic, while the demand for a luxury such as transportation, which includes airline and foreign travel, is income elastic. But What is a necessity and what is a luxury depends on the level of income. For people with a low income, food and clothing can be luxuries. So the level of income has a big effect on income elasticities of demand. Figure 4.8 shows this effect on the income elasticity of demand for food in 10 countries. In coun- tries with low incomes, such as Tanzania and India, the income elasticity of demand for food is high. In coun- tries with high incomes, such as the United States, the income elasticity of demand for food is low. TABLE 4.2 Elasticities of Demand Elastic Demand Airline travel Movies Foreign travel Electricity Restaurant meals Local buses and trains Haircucs Automobiles Inelastic Demand Tobacco Alcoholic drinks Furniture Clothing Newspapers and magazines Telephone Food Some Real-World Income 5.82 3.4I 3.08 1.94 [.6I I .33 '|.36 I .07 0.86 0.62 0.53 9.5 I 0.38 0.32 0. I4 Sources: H.S. Houthakker and Lester D. Taylor. Consumer Demand in the United States (Cambridge. Mass; Harvard University Press. I970). and Henri Theil. Ching-I'an Chung.a.nd james LSmIe.jr-..Advances in Econometrics, Supplement I, I989, International Evidence on Consumption Patterns (Green— wichI Conn.:]Al.Press. inc.. I 989). MORE ELASTICITIES 0F DEMAND FIGURE 4.8 Income Elasticities in I0 Countries Country Income (percentage of U.S. income) Tanzania —3-3 India —s-2 Korea —2o-4 3m“ —35-3 Greece —41.3 Spain _55-9 Japan _6'|.6 France _8‘l.1 Canada -99.2 Uniled Slates - 100 O 0.2 0.4 0.6 0. B I .0 Income elaslicity ' As income increases, the income elasticity of demand for food decreases. Low-income consumers spend a larger percentage of any increase in income on food than do high-income consumers. Source: Henri Theil. Ching-Farl Chung. and james L Seale.]r.. Advances in Econometric, Supplement I, I989, International Evidence on Consumption Patterns (Greenwich, Conn.:]Al Press. Inc" I989). ...
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income_e,_parkin - The income elasticity of demand is...

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