Price Sensitivity

and finance Allah shmoop What is income Elasticity All right

people when you get a pay raise you feel like

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

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

flexible Income elasticity also known as income Elasticity of demand

is a way to measure how changes an income change

Consumer demand like incoming elasticity is calculated by taking the

percent change in demand Numinous old over old and dividing

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

it looks like So back to that pay raise of

yours as income rises while we can expect to see

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

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

things you normally buy right there Just goods you want

more of when you have more money in your pocket

A normal good for you might be gourmet coffee I

gotta love that For your sister a normal good might

be more quality fashionable clothes with intentional holes ripped in

them for your weird uncle Well more income might mean

artistic statues in his backyard Yeah to each his own

But as long as you start demanding more of a

good in response to more money to pay for it

you then have a positive income elasticity for that good

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

you got a ten percent raise which caused you to

buy five percent more coffee Well that would mean five

percent increase in demand divided by ten percent increase in

income or a positive income Elasticity of demand of a

positive point five Yeah we can smell the freshly ground

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

your boss said psych no raise for you Bummer Well

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

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

a positive zero point five incoming elasticity on a graph

where quantity demand it is on the X axis right

there and income is on the Y axis well normal

goods r sloping upward The more money we have the

more of that normal good will want to buy And

the opposite of normal goods are in theory your goods

which our goods that have a negative income elasticity like

inferior goods or goods You can live without my goods

You demand less as income rises It may or may

not be true for you but for many people fast

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

out of chicken parts in the intestine and pig hooves

but because it has negative incoming elasticity Like remember when

your boss took back that pay raise will it meant

less gourmet Kona coffee a normal good and mohr fastfood

coffee and inferior good Well the initial ten percent pay

raise had led to an eight percent decrease in your

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

the net number to you as a negative eight percent

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

you a negative zero point eight income elasticity When your

boss took back to pay raise grumble grumble your income

went down and consumption of bitter burn fast food coffee

went back up positive Eight percent divided by negative ten

percent is negative point eight Okay well on the graph

inferior goods or downward sloping The more money we have

the less you know french fries that we really want

to buy What about goods you buy the same amount

of no matter what your income like things like water

and toilet paper Well on the graph If the queue

stays the same regardless of a change in income than

the curve for that good would be a straight line

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

Still the same amount of toilet paper demanded That makes

our percent change in demand on top zero since well

there was no change if you went from buying one

bundle of TP before a raise and one bundle of

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

and zero divided by anything in California and any other

state in the nation is zero Which makes sense since

the line is vertical But hey what about luxury goods

Well as it turns out luxury goods or just a

type of normal good except more expense usually a luxury

good is a normal good because it has a positive

income elasticity What makes it different Well it has to

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

say a ten percent increase in your weird uncles income

resulted in a twenty percent increase in demand for his

weird yard art In our formula that would mean positive

Twenty percent is on top and positive Ten percent is

on the bottom for an income elasticity of two Well

think about what an incoming elasticity of at least one

means Your increase in demand for good must be the

same as the increase in your income or greater What

makes luxury goods luxury is being able to afford to

buy more of something than the proportion of your increase

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

rather by then those odd things your uncle is decorating

his yard with but well different strokes for different folks

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