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Chapter 4

ECON101 Chapter Notes - Chapter 4: Unit


Department
Economics
Course Code
ECON101
Professor
Corey Van De Waal
Chapter
4

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Your expenditure and your elasticity
- If your demand for the good is ELASTIC, a 1% price cut increases the quantity you buy by
MORE than 1% and your expenditure on the item INCREASES
o If you spend more on an item when its price falls your demand of the good is
ELASTIC
- If your demand for the good is INELASTIC, a 1% price cut increases the quantity you buy
by LESS than 1% and your expenditure on the item DECREASES
o If you spend less on an item when its price falls your demand of the good is
INELASTIC
- If your demand for the good is UNIT ELASTIC, a 1% price cut increases the quantity you
buy BY 1% and your expenditure on the item DOES NOT CHANGE
o If you spend the same amount on an item when its price falls your demand of
the good is UNIT ELASTIC
More Elasticities of Demand
The income elasticity of demand is a measure of the responsiveness of the demand for a
good/service to a change in come, other things remaining the same
Income elasticity of demand = % change in quantity demanded / % change in income
Income elasticity of demand can be + or and they fall into 3 ranges:
- Positive and >1 NORMAL good, income elastic
- Positive and <1 NORMAL good, income inelastic
- Negative INFERIOR good
If the demand for a good is INCOME ELASTIC, the % of income spent on that good INCREASES as
income INCREASES
If the demand for a good is INCOME INELASTIC, the % of income spent on that good DECREASES
as income INCREASES
When the income elasticity of demand is greater than 1 (income elastic), the % of income spent
on the good INCREASES as income INCREASES
when the income elasticity of demand is less than 1 (income inelastic or interior), the % of
income spent on the good DECREASES as income INCREASES
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