Changes

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.

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.

==Calculating Elasticities==

==Minor Point about Calculating Elasticities==

 

There is an ambiguity in calculating the percentage change in price or quantity.  What should be used as the denominator in deriving the percentages?  If $100 increases to $110, then the percent change could be described as $10/$100 x 100% or $10/$110 x 100%.  Above we used the initial price and quantity as the denominator, but we could have used the final price and quantity as the denominator instead.

There is an ambiguity in calculating the percentage change in price or quantity.  What should be used as the denominator in deriving the percentages?  If $100 increases to $110, then the percent change could be described as $10/$100 x 100% or $10/$110 x 100%.  Above we used the initial price and quantity as the denominator, but we could have used the final price and quantity as the denominator instead.

Economists resolve this by typically using the average overall value as the denominator in calculating the elasticities.  So if the price changes from $20 to $30, the percentage change in price is $10 divided by the average of $20 and $30, which is $25.  The percentage change is thus $10/$25, which is 40%.  This is also known as the “arc elasticity” because it is a more accurate depiction of the “arc” or curve of demand.  Use this method when doing specific calculations on homework.

Economists resolve this by typically using the average overall value as the denominator in calculating the elasticities.  So if the price changes from $20 to $30, the percentage change in price is $10 divided by the average of $20 and $30, which is $25.  The percentage change is thus $10/$25, which is 40%.  This is also known as the “arc elasticity” because it is a more accurate depiction of the “arc” or curve of demand.  Use this method when doing specific calculations on homework in order to obtain the precise result.

==Complements and Substitutes==

==Complements and Substitutes==