Changes
income elasticity
== Review: Elasticity ==
In Lecture 3 we learned about "elasticity". Let's define it again: '''''elasticity is the responsiveness of in demand for a particular good due to changes in a variable such price or income'''''.<ref>There is also an elasticity '''''of supply''''' of a particular good that we'll mention below.</ref>
The concept of elasticity is worth learning well. Many questions on an economics exam (such as the CLEP) ask about elasticity. If you can know elasticity inside and out then you'll have a big advantage on an economics exam.
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 have 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 to describe 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 Question 4 of Lecture Three question 4 by your teacher was when he described "necessity" and "luxury" goods in terms of '''''price''''' elasticity rather than '''''income''''' elasticity.
This table is a useful study guidefor income elasticity:
{| class="wikitable"
