AGEC 105 Lecture Notes - Lecture 7: Normal Good, Demand Curve, Inferior Good

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Ag Econ Lecture 7
Topics of Discussion
1. Income elasticity of demand
2. Cross price elasticity of demand
3. Other general properties
4. Applicability of demand elasticities
Income Elasticity of Demand
Income Elasticity of Demand = % change in quantity / % change in income
[Q I] x [average of I average of Q]
o Average of I = (Ia +Ib) 2
o Average of Q = (Qa +Qb) 2
o Q = (Qa Qb)
o I = (Ia Ib)
o Indicated potential changes or shifts in the demand curve as consumer income (I)
changes
Interpreting the Income Elasticity of Demand
If the Income Elasticity is equal
to:
The Good is Classified as:
Greater than 1.0
A luxury and a normal good
Less the 1.0 but greater than 0.0
A necessity and a normal good
Less than 0.0
An inferior good
Example from the lecture:
Assume the government cuts taxes, thereby increasing disposable income by 5%. The income
elasticity for chicken is .3645.
o What impact would this tax cut have upon the demand for chicken? + 1.8%
o Is chicken a normal good or an inferior good? Why?
Chicken is a normal good but not a luxury since the income elasticity is
> 0 but < 1.0
Cross Price Elasticity of Demand
Cross Price Elasticity Demand = % change in quantity / % change in another price
o Average PT = (PTa + PTb) 2
o Average QH = (QHa + QHb) 2
o QH = (QHa QHb)
o PT = (PTa PTb)
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