Elasticity

Question 1

define income elasticity of demand

Answer 1

responsiveness of demand to a change in income

Question 2

Income elasticity of necessities

Answer 2

Demand will always be income inelastic basic goods e.g. food water, electricity, petrol

Income inelastic - between -1 and 1

Question 3

Income elasticity of luxury goods

Answer 3

Luxury goods are bought if consumers can afford them - optional, therefore the demand is income elastic e.g. air travel, designer clothes …

Income elastic >1 or

Question 4

define discretionary spending

Answer 4

non-essential spending/spending that is not automatic

Question 5

How to identify a normal good by its YED

Answer 5

If income elasticity value is positive - income increases q demanded increases therefore is a normal good.

Question 6

How to identify an inferior good by its YED

Answer 6

If income elasticity value is negative - income increases q demanded decreases therefore is an inferior good.

Question 7

How to calculate income elasticity of demand?

Answer 7

% change in quantity demanded/ % change in income

Question 8

How to calculate price elasticity of demand?

Answer 8

% change in quantity demanded/ % change in price

Question 9

How to calculate price elasticity of supply?

Answer 9

% change in quantity supplied/ % change in price