Access over 20 million homework & study documents
search

economics10

Content type

User Generated

Type

Study Guide

Rating

Showing Page:
1/9
Question 3
Demand elasticity is a measure of how much the quantity demanded will change if another factor
changes. In proper words, it is the relative response of one variable to changes in another
variable. The three main types of elasticity but only two will be discussed and they as follows:
A. Income elasticity of demand (YED)
Income elasticity of demand (YED) measures the relationship between a change in quantity
demanded for good X and a change in real income. The formula for calculating income
elasticity of demand:
E = change in quantity demanded
change in income
The degree to which the quantity demanded for good changes in response to a change in income
depends on whether the good is a necessity or a luxury as describe below:
i. Normal Goods
Normal goods have a positive income elasticity of demand (between 0 and +1) so as income rises
more is demanded at each price level. A good example of a normal good is the type of clothes we
buy. If a consumer has low income, he will buy inexpensive clothes. However when the
consumer starts to earn more money he is likely to buy more expensive and branded clothes. In
other words, the consumption increases as the income increases.
ii. Luxury Goods
Luxuries are items we can manage to do without during periods of below average and have an
income elasticity of demand > +1. When incomes are rising strongly and consumers can make
big spending, so the demand for luxury goods will grow. Conversely in a recession, customers
will minimize their spending and rebuild savings.

Sign up to view the full document!

lock_open Sign Up
Showing Page:
2/9
An example of a luxury good is a round of golf. When income is low, we will not play golf.
However, once income rises the consumer can afford to play golf. In other words, the increase in
playing golf will be 100 percent while the increase in income may have only been 15 percent.
iii. Inferior Goods
A type of good for which demand declines as the level of income or real GDP in the economy
increases. Inferior goods have a negative income elasticity of demand. In a recession the demand
for inferior products might actually grow .Transportation provides a good example of inferior
goods. When income is low, consumers prefer to ride the bus. But as income increases, people
stop riding the bus and start buying cars. Bus riding declines as income increases.
Let’s take an example to illustrate normal goods and inferior goods. There are two commodities
in the economy; flour and consumers are consuming both. Presently both commodities face a
downward sloping graph, that is the higher the price the lesser will be the demand and vice versa.
If the income of consumer rises, then he would be more inclined towards wheat flour which is
more costly than jowar flour. Therefore, he will switch his flour demand from jowar to wheat.
Hence jowar, whose demand has fallen due to an increase in income, is the inferior good and
wheat is the normal good as shown below:
It should be noted that YED is used by businesses for various purposes as shown below:

Sign up to view the full document!

lock_open Sign Up
Showing Page:
3/9

Sign up to view the full document!

lock_open Sign Up

Unformatted Attachment Preview

Question 3 Demand elasticity is a measure of how much the quantity demanded will change if another factor changes. In proper words, it is the relative response of one variable to changes in another variable. The three main types of elasticity but only two will be discussed and they as follows: A. Income elasticity of demand (YED) Income elasticity of demand (YED) measures the relationship between a change in quantity demanded for good X and a change in real income.  The formula for calculating income elasticity of demand: E = change in quantity demanded change in income The degree to which the quantity demanded for good changes in response to a change in income depends on whether the good is a necessity or a luxury as describe below: i. Normal Goods Normal goods have a positive income elasticity of demand (between 0 and +1) so as income rises more is demanded at each price level. A good example of a normal good is the type of clothes we buy. If a consumer has low income, he will buy inexpensive clothes. However when the consumer starts to earn more money he is likely to buy more expensive and branded clothes. In other words, the consumption increases as the income increases. ii. Luxury Goods Luxuries are items we can manage to do without during periods of below average and have an income elasticity of demand > +1. When incomes are rising strongly and consumers can make big spending, so the demand for luxury goods will grow. Conversely in a recession, customers will minimi ...
Purchase document to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Anonymous
Just the thing I needed, saved me a lot of time.

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4