Income Elasticity of Demand

9 Key excerpts on "Income Elasticity of Demand"

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  Microeconomics

  • David Besanko, Ronald Braeutigam(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  53 2.3 OTHER ELASTICITIES We can use elasticity to characterize the responsiveness of demand to any of the determinants of demand. Two of the more common elasticities in addition to the price elasticity of demand are the Income Elasticity of Demand and the cross-price elasticity of demand. Income Elasticity of Demand The Income Elasticity of Demand is the ratio of the percentage change of quantity demanded to the percentage change of income, holding price and all other determi- nants of demand constant: , 100% 100% Q Q Q I I I  or, after rearranging terms, , Q I Q I I Q  (2.5) Table 2.5 shows estimated income elasticities of demand for two different types of U.S. households: those whose incomes place them below the poverty line and those whose incomes place them above it. For both types of households, the estimated income elasticities of demand are positive, indicating that the quantity demanded of the good increases as income increases. However, it is also possible that Income Elasticity of Demand can be negative. Some studies suggest that in economically advanced countries in Asia, such as Japan and Taiwan, the Income Elasticity of Demand for rice is negative. 19 OTHER ELASTICITIES 2.3 Income Elasticity of Demand The ratio of the percentage change of quantity demanded to the percentage change of income, holding price and all other determinants of demand constant. Price Elasticity of Demand in a Local Gasoline Market Extending the methodology utilized in the study by Berry, Levinsohn, and Pakes described in Applica- tion 2.4, Jean-François Houde estimated demand func- tions for local gasoline stations in Quebec City, Canada using data from 1991 to 2001. 18 One of the novelties of Houde’s study is that it explicitly incorporated the spatial structure of demand—that is, the fact that for local retail ser- vices such as gasoline stations, a key determinant of demand is the location of sellers compared to the loca- tions and commuting patterns of consumers.

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  Microeconomics

  A Global Text

  • Judy Whitehead(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  76 THE Income Elasticity of Demand 3.3 Countries aiming to benefit from a currency devaluation must pay special attention to price elasticities of demand for both their imports and for their exports. This is the foundation of the Marshall–Lerner condition, which states that in order for a fall in a country’s exchange rate (devaluation) to reduce the country’s Balance of Payments deficit (i.e. increase the country’s foreign reserves), the sum of the price elasticity of demand coefficients for exports and imports must be greater than one. 3.3 THE Income Elasticity of Demand In addition to the price elasticity of demand, the Income Elasticity of Demand provides a useful tool for the analysis of consumer behaviour and for planning by the firm or the state. 3.3.1 Definition of Income Elasticity of Demand The income elasticity ( η Y ) for commodity x may be defined as: proportionate change in quantity of good x ( Q x ) η Y = proportionate change in income ( Y ) This may be written as: d Q x / Q x η Y = d Y / Y or: d Q x Y η Y = · d Y Q x ¯ where the Y used for income in the above equations is really the Y used to symbolize real (as opposed to nominal) income. As explained in Chapter 2, the income-consumption curve ( ICC ) is used to derive the Engel curve. The Engel curve is then used for illustration of the Income Elasticity of Demand. The Engel curve shows the relationship between real income ( Y ¯ ) and the quantity of commodity x demanded ( Q x ). Using Figure 3.11 , the Income Elasticity of Demand η Y for good x may be computed using the formula for income elasticity. The income elasticity at the point R ( η Y ( R )) on the Engel curve is found diagrammatically as follows: • Drop a perpendicular from the point R to the X -axis at S . • Take a perpendicular from the point R across to the Y -axis at A . • Identify from the diagram, the components of the income elasticity formula: C H A P T E R 3 d Q x Y η Y = · d Y Q x 77

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  Introduction to Economics

  Social Issues and Economic Thinking

  • Wendy A. Stock(Author)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  SUMMARY In this chapter, we learned about the elasticity of demand, which measures how respon- sive consumers are to changes in the prices of goods and services. When changes in quantity demanded are relatively large in response to price changes, demand is elas- tic. When changes in quantity demanded are relatively small in response to price changes, demand is inelastic. Goods with few substitutes and goods that are neces- sities have relatively inelastic demand. Demand tends to be more elastic for goods when consumers have more time to adjust to price changes and when consumers spend larger fractions of their incomes on the goods. How total revenue responds to price changes is influenced by the elasticity of demand. When the demand for a good is inelastic, sellers can increase total revenue by increasing the price of the good. When demand is elastic, sellers can increase total revenue by decreasing the price of the good. KEY CONCEPTS • Elasticity • Price elasticity of demand • Elastic demand • Inelastic demand • Perfectly inelastic demand • Perfectly elastic demand • Unit elastic demand • Elasticity coefficient • Total revenue K e y C o n c e p t s 9 1 9 2 C H A P T E R 5 E l a s t i c i t y DISCUSSION QUESTIONS AND PROBLEMS 1. Suppose that the adoption fee at the animal shelter is initially $15.00 and the average number of animals adopted per week at that price is 100. In the face of ris- ing costs, there is an increase in the pet adoption fees at the animal shelter from $15.00 to $22.50 (a 50 percent price increase). Proponents of the increase argue that it is necessary to raise revenues for the shelter. Critics of the plan worry that the fee increase might decrease adoptions enough to actually lower shelter revenues. a. What is the revenue earned by the shelter for ani- mal adoptions before the fee increase? b. Suppose animal adoptions fall by 10 percent in response to the 50 percent fee increase (to 90 animals per week).

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  Economics

  • William Boyes, Michael Melvin(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  He found that not only had ticket sales declined, but his revenue had fallen as well. Where had the manager gone wrong? 1. How much do buyers alter their purchases in response to a price change? 434 Chapter 20 Elasticity: Demand and Supply Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 20-1a The Definition of Price Elasticity Elasticity is the measure of the responsiveness of quantity demanded or quantity supplied to a change in price or some other important variable . By “responsiveness” we mean “how much quantity demanded or quantity supplied changes with respect to a change in one variable, everything else held constant.” We have measures of elasticity for both demand and supply. The price elasticity of demand is a measure of the magnitude by which consumers alter the quantity of some product that they purchase in response to a change in the price of that product. The price elasticity of demand, symbolized as e d , is the percentage change in the quan-tity demanded of a product divided by the percentage change in the price of that product. e d ¼ % D Q D % D P The more price-elastic demand is, the more responsive consumers are to a price change—that is, the more they will adjust their purchases of a product when the price of that product changes. Conversely, the less price-elastic demand is, the less responsive consumers are to a price change. Demand curves typically slope down. This means that price ( P ) and quantity ( Q D ) demanded move in opposite directions. Whenever P falls, Q D rises, and when P rises Q D falls.

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  Price Concepts and Production Economics

  • (Author)
  • 2014(Publication Date)
  • College Publishing House

    (Publisher)

  ____________________ WORLD TECHNOLOGIES ____________________ Chapter- 3 Price Elasticity of Demand PED is derived from the percentage change in quantity (%ΔQ d ) and percentage change in price (%ΔP). Price elasticity of demand ( PED or E d ) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income). It was devised by Alfred Marshall. Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic ) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic ) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded. Revenue is maximised when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence (or burden) of a tax on that good. ____________________ WORLD TECHNOLOGIES ____________________ Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis. Definition PED is a measure of responsiveness of the quantity of a good or service demanded to changes in its price.

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  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  It follows, then, that if market demand is elastic, a fall in price will result in an increase in total revenue to sellers as a whole, and if demand is inelastic, a fall in price will result in a decrease in total revenue to sellers. Clearly, if the demand faced by any given seller were inelastic at the current price, that seller could increase revenue by increasing the price. Moreover, because demand is 46 Economics for Investment Decision Makers negatively sloped, the increase in price would decrease total units sold, which would almost certainly decrease total cost. So no one-product seller would ever knowingly choose to set price in the inelastic range of the demand. 4.3. Income Elasticity of Demand: Normal and Inferior Goods In general, elasticity is simply a measure of how sensitive one variable is to change in the value of another variable. Quantity demanded of a good is a function of not only its own price, but also consumer income. If income changes, the quantity demanded can respond, so the analyst needs to understand the income sensitivity as well as price sensitivity. Income Elasticity of Demand is defined as the percentage change in quantity demanded divided by the percentage change in income (I), holding all other things constant, and can be represented as in Equation 1-25. E d I ¼ %ΔQ d x %ΔI ¼ ΔQ d x Q d x ΔI I ¼ ΔQ d x ΔI   I Q d x   ð1-25Þ Note that the structure of this expression is identical to the structure of own-price elasticity in Equation 1-24. Indeed, all elasticity measures that we will examine will have the EXHIBIT 1-22 Elasticity and Total Expenditure P Q In the elastic range, a fall in price accompanies a rise in total expenditure. In the inelastic range, a fall in price accompanies a fall in total expenditure. Note: Figure depicts the relationship among changes in price, changes in quantity, and changes in total expenditure.

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  Microeconomics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  In a market economy, prices tell producers and consumers about the relative scarcity of resources and products. A downward-sloping demand curve and an upward-sloping supply curve form a powerful analytical tool. To use this tool wisely, you must learn more about these curves. The more you know, the better you can predict the effects of a change in the price on quantity. Decision mak-ers are willing to pay dearly for such knowledge. For example, Taco Bell would like to know what happens to sales if taco prices change. Governments would like to know how a hike in cigarette taxes affects teenage smoking. Colleges would like to know how tuition increases affect enroll-ments. And subway officials would like to know how fare changes affect ridership. To answer such questions, you must learn how responsive consumers and producers are to price changes. This chapter introduces the idea of elasticity , a measure of responsiveness . Topics discussed in this chapter include: 5-1 Price Elasticity of Demand Just before a recent Thanksgiving, Delta Airlines cut fares for some seats on more than 10,000 domestic flights. Was that a good idea? A firm’s success or failure often depends on how much it knows about the demand for its product. For Delta’s total revenue to increase, the gain in tickets sold would have to more than make up for the decline in ticket prices. Likewise, the operators of Taco Bell would like to know what happens to sales if the price drops from, say, $1.10 to $0.90 per taco. The law of demand tells us that a lower price increases quantity demanded, but by how much? How sensitive is quantity demanded to a change in price? After all, if quantity demanded increases enough, a price cut could be a profitable move for Taco Bell. 5-1a Calculating Price Elasticity of Demand Let’s get more specific about how sensitive changes in quantity demanded are to changes in price.

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  Principles of Economics in Context

  • Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Brian Roach, Mariano Torras, Jonathan Harris, Julie Nelson(Authors)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  The most common kinds of elasticity are those related to changes in the quantity demanded or quantity supplied with changes in price (i.e., movement along a demand or supply curve). But we can also measure elasticity with respect to changes in income or other nonprice determinants (i.e., shifts in demand or supply). 1. T HE P RICE E LASTICITY OF D EMAND When the MBTA raised its prices in July 2016, by an average of 9 percent, do you think rider -ship declined a little or a lot? It depends on the price elasticity of demand (often just called the “elasticity of demand”), which is the responsiveness of the quantity demanded to a change in price. Elasticity of demand is the particular elasticity most studied by economists. Businesses can use information on the elasticity of demand for their products to set prices. Governments can use elasticity of demand estimates to determine how much revenue they would raise with a tax on a particular product. elasticity: a measure of the responsiveness of an economic actor to changes in market factors, including price and income price elasticity of demand: the responsiveness of the quantity demanded to a change in price Elasticity 5 C HAPTER 5 – E LASTICITY 110 1.1 P RICE -I NELASTIC D EMAND Demand for a good is price inelastic if the effect of a price change on the quantity demanded is fairly small. Demand might be price inelastic for three main reasons: 1. There are very few good, close substitutes for the good or service. 2. The good or service is something that people need, rather than just want. 3. The cost of the good or service is a very small part of a buyer’s budget. For example, gasoline has no good, close substitutes for powering nonelectric motor vehicles. When gas prices rise, most drivers still need to use their vehicles to get to work, run errands, and so on. So gasoline is an example of a good that is price inelastic because of the lack of any good substitutes, and also because people believe that they need it.

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  Economics

  A Contemporary Introduction

  • William A. McEachern(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 94 Part 2 Introduction to the Market System be represented as Δp and the change in quantity as Δq. The formula for calculating the price elasticity of demand E D between the two points is the percentage change in quan- tity demanded divided by the percentage change in price, or E D 5 Δq 4 Δp (q1q9)/2 (p1p9)/2 Again, the same elasticity results whether going from the higher price to the lower price or the other way around. This is sometimes called the midpoint formula, because the bases for computing percentages are midway between the two points on the curve. Elasticity expresses a relationship between two amounts: the percentage change in quantity demanded and the percentage change in price. Because the focus is on the per- centage change, we don’t need to be concerned with how output or price is measured. For example, suppose the good in question is apples. It makes no difference in the elasticity formula whether we measure apples in pounds, bushels, or even tons. All that matters is the percentage change in quantity demanded. Nor does it matter whether we measure price in U.S. dollars, Mexican pesos, Zambian kwacha, or Vietnamese dong. All that matters is the percentage change in price. Finally, the law of demand states that price and quantity demanded are inversely related, so the change in price and the change in quantity demanded move in opposite directions. In the elasticity formula, the numerator and the denominator have opposite signs, leaving the price elasticity of demand with a negative sign.

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