Income Elasticity Income Elasticity change in quantity demanded

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 Qd 2 – Qd 1 * Y 1 Y 2 – Y 1 Qd 1

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)Qd 2 – Qd 1 * Y 1 Y 2 – Y 1 30 - 50 Qd 1 * 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)Qd 2 – Qd 1 * Y 1 Y 2 – Y 1 400 -600 Qd 1 * 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 Qd 2 y – Qd 1 y * Px 1 Px 2 – Px 1 Qd 1 y

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 5 - 8 * 8 = 0. 53 1000 Then the 2 goods are substitute. If price of x dec. by 1 %, Qd of y will dec. by 0. 53 %.