Income Elasticity
Income Elasticity % change in quantity demanded % change in Income
Income Elasticity 1)Less than Zero 2) 0.1-----0.9 3) More than one
1)Less than Zero Negative -------- Inferior good. If Income increase--------- Quantity demanded decrease. If Income decrease -----------Quantity demanded increase.
2) More than zero & less than 1 0.1------0.9 Normal Good Income Elasticity= % change in Qd % Change in Income % change in Income > % change in Qd
3) Greater than 1 Luxury Goods Income Elasticity= % change in Qd % change in Income % change in Qd > % change in Income
Income Elasticity Qd2 – Qd1 * Y1 Y2 – Y1 Qd1
Example 1 I f income increase from $ 500 to $ 800 , quantity demanded decrease from 50 K.g to 30 K.g. What is Income Elasticity, Meaning and type?
Income Elasticity 1)Qd2 – Qd1 * Y1 Y2 – Y1 Qd1 30- 50 * 500 = - 0.67 30- 50 * 500 = - 0.67 800-500 50 2) Type = Inferior good 3) If income inc. by 1 % , Qd will dec. by o.67 %.
Example 2 If the income doubled from 50 L.E to 100 L.E and the Qd decreased from 600 kilos to 400 kilos. Find the income elasticity and explain its meaning.
1)Qd2 – Qd1 * Y1 Y2 – Y1 Qd1 400-600 * 50 = - 0.33 100-50 600 2) Type = Inferior good 3) If income inc. by 1 % , Qd will dec. by o.33 %.
Cross Elasticity % change in Qd of (Y) % change in price of (X)
1) Greater than Zero Positive-------------- substitutes ( Tea, coffee) If p tea inc.--------- Qd tea dec.------ Qd coffee inc. % change in quantity demand of( coffee) % change in price of (tea)
2)Less than Zero Negative----------- complements( Tea, sugar) If p tea inc.---------Qd tea dec. ---------- Qd sugar dec. % change in quantity demand of Sugar % change in price of tea
3) Zero Independent (Pen & A.c )
Cross Elasticity Qd2y – Qd1y * Px1 Px2 – Px1 Qd1y
Example 1 If the price of good x decreased from L.E 8 to L.E 5, the quantity demand of Y decrease from 1000 to 800 Kilos , Find the cross Elasticity?
Elasticity =800-1000 * 8 = 0.53 5 - 8 1000 Then the 2 goods are substitute. If price of x dec. by 1 %, Qd of y will dec. by 0.53 %.