ECON101 Lecture Notes - Lecture 11: Inferior Good

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Income Elasticity of Demand 01:51
Measures the responsiveness of quantity demand in change of income
Ex: Ey = percentage in quantity demanded / percentage change in income
Insert equation 1
Example 1: y1 - $900 y2 - $960
Q1 – 32 q2 – 30
Ey = -1
negative tells us that it is an inferior good, value tells us “unitary income elasticity
of demand” (the percentage change in quantity demanded is equal to the
percentage change in income )
Example 2: y1 - $1000 y2 - $1500
Q1 – 6 q2 – 8
Ey = +0.7
positive tells us that it is a normal/superior good, value tells us “inelastic income
elasticity of demand” (the percentage change in quantity demanded is less than the
percentage change in income)
Example 3: y1 - $825 y2 - $900
Q1 – 16 q2 – 13
Ey = -2.4
Negative tells us inferior good, value tells us “elastic income elasticity of demand”
(the percentage change in quantity demanded exceeds percentage change in
income)
Factors affecting income elasticity of demand
The demand for commodities classified as necessities such as food is income
inelastic
Demand for commodities classified as luxuries such as jewelry is income elastic (Y
goes down qD (jewelry) goes down significantly)
What constitutes necessities vs. luxuries depends on the level of income
Ex: automobile – some may consider it as a luxury/necessity
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