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Income and Cross Elasticities of Demand

   

Added on  2021-06-07

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Lecture 6Income and Cross Elasticities of Demand
Income and Cross Elasticities of Demand_1

At the end of this topic, students will be able to:Describe the concept of income and cross elasticities withreference to the responsiveness of demand to changes inconsumers’income and the price ofa related productrespectively.Calculateincomeandcrosselasticitiesusingtherespective elasticity formulae.Assess the impact on demand of goods and services whenconsumerincome orprice ofrelated good changesbyapplyingtheincomeandcrosselasticityconceptsrespectively.
Income and Cross Elasticities of Demand_2

Income Elasticity of Demand (EdY)EdYmeasureshowquantitydemandedresponds to consumer income changes.Ifthe consumer’sincome changes(risesorfalls),quantity demanded changes(risesorfalls), other things constant.
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Formulas to calculate Income Elasticity of DemandPercentage change in quantity demanded Formula:Mid-Point Formula: Percentage change in consumers’ income Q2-Q1------------(Q2+Q1)/2___________I2-I1------------(I2+I1)/2
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Income Elasticity of Demand – Normal GoodsThe demand for normal goods increases as income increases. IncomeQuantity demandedEngel’s CurveY1Q1Y2Q2
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Income Elasticity of Demand – Normal GoodsIf the income elasticity is positive, then itis a normal good.For example, if a product has EY = +1.5, itmeans this product is a normalgood and isincome elastic as the coefficient is greaterthan 1.An example of such a good is luxury itemssuch as branded watches, bags and etc.
Income and Cross Elasticities of Demand_6

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