Chapter 3.2 Flashcards
Income elasticity of demand definition
A measure of the responsiveness of demand to changes in income, involves demand curve shifts
Income elasticity of demand formula
Percentage change in quantity demanded over percentage change in income
What does a YED > 0 mean?
The good is a normal good
What does a YED < 0 mean?
The good is an inferior good
What does income inelastic demand mean?
YED < 1 and the good is a necessity
What does income elastic demand mean?
YED > 1 and it is a luxury or service
What are the axes labels on the Engel curve?
Horizontal axis: quantity
Vertical axis: income
What does YED > 0 on the upward sloping part of an Engel curve mean?
The good is normal
What does YED < 0 on the downward sloping part of an Engel curve mean?
The good is inferior
How do you tell if a segment on the Engel curve is a necessity or luxury?
Extrapolate to the axes. If it crosses the vertical axis, then YED > 1 and it is a luxury. If it crosses the horizontal axis then YED < 1 and it is a necessity
What continuum does the Engel curve show?
At very low incomes a good may be a luxury; as income increases it becomes a necessity and finally at high income levels it becomes inferior
How does YED impact the expansion of industries?
Businesses with income elastic demand usually grow at a higher rate than the economy, but are also more likely to experience larger declines in recessions. Income inelastic businesses usually expand slower but also contract less
How does YED relate to the economy?
Less developed countries with lower incomes usually have a large amount of agricultural sectors, which are necessities. As income and the economy grows manufacturing and service industries usually begin to take up a larger portion of the economy due to being income elastic.
