Changes

In calculating elasticity, the numerator is the same for both price and income elasticity:  it is the percent change in quantity demanded for the good.  But the denominator is different for these two elasticities:  the denominator for price elasticity is the percent change in price of the good, while the denominator for income elasticity is the percent change in income for the buyers.

In calculating elasticity, the numerator is the same for both price and income elasticity:  it is the percent change in quantity demanded for the good.  But the denominator is different for these two elasticities:  the denominator for price elasticity is the percent change in price of the good, while the denominator for income elasticity is the percent change in income for the buyers.

Unlike price elasticity, income elasticity can be either positive or negative, depending on the good.  For a "normal" good, income elasticity is positive; for an "inferior" good, it is negative.  Inferior goods are rare: they see a decrease in demand when income by the public increases.  Usually demand for goods increase as income by the public increases, hence the name "normal good" for them.

Unlike price elasticity, income elasticity can be either positive or negative, depending on the good.  For a "normal" good, income elasticity is positive; for an "inferior" good, it is negative.  Inferior goods are rare: they see a decrease in demand when income by the public increases.  Usually demand for goods increase as income by the public increases, hence the name "normal good" for them.  Normal goods are necessities or luxuries, depending on their elasticity:  necessities are inelastic (elasticity less than 1), and luxuries are elastic (elasticity greater than 1).

The mistake on Lecture Three question 4 by your teacher was when he described "necessity" and "luxury" goods in terms of '''''price''''' elasticity rather than '''''income''''' elasticity.  A "necessity" (good or service) is one <more>

The mistake on Lecture Three question 4 by your teacher was when he described "necessity" and "luxury" goods in terms of '''''price''''' elasticity rather than '''''income''''' elasticity.  A "necessity" (good or service) is one <more>

!Necessity or Luxury?

!Necessity or Luxury?

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|-

|negative 0.5

|Yed = -0.5

|inferior

|inferior

|inelastic

|inelastic

|

|neither necessity nor luxury

|-

|-

|0.6

|Yed = 0.6

|normal

|normal

|inelastic

|inelastic

|

|necessity

|-

|-

|negative 1.9

|Yed = -1.9

|inferior

|inferior

|elastic

|elastic

|

|neither necessity nor luxury

|-

|-

|3.5

|Yed = 3.5

|normal

|normal

|elastic

|elastic

|

|luxury

|-

|-

|}

|}