Changes

Once you grasp the price elasticity of demand, you’ll see that you can describe the elasticity (or responsiveness) of many other variables in economics.

Once you grasp the price elasticity of demand, you’ll see that you can describe the elasticity (or responsiveness) of many other variables in economics.

Income, like someone’s salary at his job (about $7.50 an hour at McDonald's), affects the demand for goods.  More Mercedes-Benz luxury cars will sell when the average income increases than when it decreases.  So economists find it useful to describe the “income elasticity of demand,” which is the percentage change in quantity demanded divided by the percentage change in income.

Someone's income, like someone’s salary at his job (only about $7.50 an hour at McDonald's), affects his demand for goods.  More Mercedes-Benz luxury cars will sell when the average income increases than when it decreases.  So economists find it useful to describe the “income elasticity of demand,” which is the percentage change in quantity demanded divided by the percentage change in income.

Most goods sell in greater quantities when the income of buyers increases.  We all tend to go to restaurants more often, buy new clothes more often, and pay more for goods and services when we our income increases.  When our income declines, we reduce our purchases.

Most goods sell in greater quantities when the income of buyers increases.  We all tend to go to restaurants more often, buy new clothes more often, and pay more for goods and services when we our income increases.  When our income declines, we reduce our purchases.

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 like Mercedes-Benz cars 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 like Mercedes-Benz cars are income '''''elastic'''''.  People do not buy as many yachts and luxury cars and homes when times are tough.

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.'''''

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.  But 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.  When income increases, people buy less margarine because they are buying a more expensive, and more desirable, substitute (butter).   

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.  But 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.  When income increases, people buy less margarine because they are buying a more expensive, and more desirable, substitute (butter).   

So remember: when the income elasticity is positive, then the good is “normal”.  When the income elasticity is negative, then it is an [[inferior good]].

So remember: '''''when the income elasticity is positive, then the good is “normal”.  When the income elasticity is negative, then it is an [[inferior good]]'''''.

==Complements and Substitutes==

==Complements and Substitutes==