Changes

Consider the difference between goods we need (e.g., food) and goods we want (e.g., restaurant food).  The goods that we need are “necessities”; the goods we merely want are “luxury goods.”  Necessities are income inelastic, because they are needed and purchased whether our income is high or low.  Whether we have a good year or a bad one in terms of income, we still buy things like daily food, basic clothing, and heating at home.  In contrast, luxury goods are income elastic.  People do not buy as many yachts and luxury cars and homes when times are tough.

Consider the difference between goods we need (e.g., food) and goods we want (e.g., restaurant food).  The goods that we need are “necessities”; the goods we merely want are “luxury goods.”  Necessities are income inelastic, because they are needed and purchased whether our income is high or low.  Whether we have a good year or a bad one in terms of income, we still buy things like daily food, basic clothing, and heating at home.  In contrast, luxury goods are income elastic.  People do not buy as many yachts and luxury cars and homes when times are tough.

Here are some useful definitions.  A “normal” good is one for which demand increases when income increases.  Nearly all goods are “normal” goods.  Income goes up, then more of it is purchased.  Occasionally a good can be found that is “inferior”, such that demand actually decreases when income increases.  Can you think of one?  (Margarine is an example.  Can you explain why?)  So when the income elasticity is positive, then the good is “normal”.  When the income elasticity is negative, then the good is “inferior”.

Here are some useful definitions.  A [[normal good]] is one for which demand increases when income increases.  Nearly all goods are “normal” goods.  Income goes up, then more of it is purchased.  Occasionally a good can be found that is “inferior”, such that demand actually decreases when income increases.  Can you think of one?  (Margarine is an example.  Can you explain why?)  So when the income elasticity is positive, then the good is “normal”.  When the income elasticity is negative, then it is an [[inferior good]].

A “necessity” is a good that has a positive income elasticity that is less than 1.  A “luxury” good is a good that has an income elasticity greater than 1.

A [[necessity]] is a good that has a positive income elasticity that is less than 1.  A [[luxury]] is a good that has an income elasticity greater than 1.

IV. Calculating Elasticities

IV. Calculating Elasticities