Income elasticity presentation, Summaries of Economics

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Income

elasticity

and cross

elasticity of

What is income elasticity of demand? Income elasticity of demand measures the responsiveness of demand to a change in income. Consider two products: A and B. If income rises by 10 per cent the quantity demanded for product A rises by 25 per cent, demand of product A is very responsive to the change in income. Economists would say that demand for product A is income elastic. In contrast, if the quantity demanded for product B rose by 5 per cent, economists would say the demand for product B is income inelastic It is possible to calculate income elasticity of demand using the formula

• PRICE INELASTIC

DEMAND

This is a change in price that

results in a proportionately

smaller change in the

quantity demanded.

-PRICE ELASTIC

DEMAND

Change in price that results in a greater change in the quantity demanded.Goods with elastic demand are more responsive to price changes

INTERPRETING THE NUMERICAL VALUE OF

ELASTICITY

FACTORS AFFECTING PED

TIME Availability Of substitutes Degree of necessity Goods considered essential by consumers will have inelastic demand. This is because when prices of essentials such as food rise, consumers cannot reduce the amounts they purchase significantly Goods that have a lot of substitutes will tend to have an elastic demand, this is because consumers can easily switch from one product to another. In the short term, goods have inelastic demand because it can often take a consumer a long time to find a substitute when price rises

HORIZONTAL CURVE- Horizontal demand curve shows demand curve for a good that has perfect elastic demand. This means buyers purchase as much as they possibly can