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and finance Allah shmoop What is income Elasticity All right

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people when you get a pay raise you feel like

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you're on top of the world King of a fatter

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wallet With all that dough you're starting to feel more

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flexible Income elasticity also known as income Elasticity of demand

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is a way to measure how changes an income change

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Consumer demand like incoming elasticity is calculated by taking the

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percent change in demand Numinous old over old and dividing

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it by the percent change in income Yeah that's what

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it looks like So back to that pay raise of

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yours as income rises while we can expect to see

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the demand for normal goods to rise Actually that's kind

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of the definition of normal goods like normal goods aren't

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things you normally buy right there Just goods you want

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more of when you have more money in your pocket

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A normal good for you might be gourmet coffee I

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gotta love that For your sister a normal good might

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be more quality fashionable clothes with intentional holes ripped in

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them for your weird uncle Well more income might mean

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artistic statues in his backyard Yeah to each his own

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But as long as you start demanding more of a

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good in response to more money to pay for it

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you then have a positive income elasticity for that good

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which means it's a normal good For instance let's say

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you got a ten percent raise which caused you to

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buy five percent more coffee Well that would mean five

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percent increase in demand divided by ten percent increase in

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income or a positive income Elasticity of demand of a

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positive point five Yeah we can smell the freshly ground

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Kona right now Well let's say that a month later

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your boss said psych no raise for you Bummer Well

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we'd simply switch the signs It's negative five percent then

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divided by that negative ten percent Ten It's still equals

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a positive zero point five incoming elasticity on a graph

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where quantity demand it is on the X axis right

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there and income is on the Y axis well normal

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goods r sloping upward The more money we have the

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more of that normal good will want to buy And

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the opposite of normal goods are in theory your goods

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which our goods that have a negative income elasticity like

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inferior goods or goods You can live without my goods

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You demand less as income rises It may or may

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not be true for you but for many people fast

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food is an inferior good right Not because it's made

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out of chicken parts in the intestine and pig hooves

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but because it has negative incoming elasticity Like remember when

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your boss took back that pay raise will it meant

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less gourmet Kona coffee a normal good and mohr fastfood

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coffee and inferior good Well the initial ten percent pay

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raise had led to an eight percent decrease in your

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consumption of watery Mickey D's coffee So then you calculate

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the net number to you as a negative eight percent

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They're divided by a positive ten percent so that gives

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you a negative zero point eight income elasticity When your

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boss took back to pay raise grumble grumble your income

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went down and consumption of bitter burn fast food coffee

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went back up positive Eight percent divided by negative ten

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percent is negative point eight Okay well on the graph

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inferior goods or downward sloping The more money we have

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the less you know french fries that we really want

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to buy What about goods you buy the same amount

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of no matter what your income like things like water

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and toilet paper Well on the graph If the queue

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stays the same regardless of a change in income than

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the curve for that good would be a straight line

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upward Twenty percent raise ten percent pay cut Doesn't matter

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Still the same amount of toilet paper demanded That makes

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our percent change in demand on top zero since well

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there was no change if you went from buying one

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bundle of TP before a raise and one bundle of

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TP after a raise Yeah it's a change of zero

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and zero divided by anything in California and any other

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state in the nation is zero Which makes sense since

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the line is vertical But hey what about luxury goods

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Well as it turns out luxury goods or just a

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type of normal good except more expense usually a luxury

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good is a normal good because it has a positive

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income elasticity What makes it different Well it has to

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have an incoming elasticity greater than one For example let's

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say a ten percent increase in your weird uncles income

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resulted in a twenty percent increase in demand for his

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weird yard art In our formula that would mean positive

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Twenty percent is on top and positive Ten percent is

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on the bottom for an income elasticity of two Well

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think about what an incoming elasticity of at least one

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means Your increase in demand for good must be the

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same as the increase in your income or greater What

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makes luxury goods luxury is being able to afford to

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buy more of something than the proportion of your increase

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in income Well there are a lot of things you'd

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rather by then those odd things your uncle is decorating

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his yard with but well different strokes for different folks

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As they say luxury is in the eye of the 00:04:52.965 --> [endTime] consumer here

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