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Income Elasticity of Demand

Income Elasticity of Demand. And Cross-Price Elasticity of Demand. Income Elasticity of Demand. E I = %  Q d / %  I d Measures the sensitivity of DEMAND to changes in disposable income . Engel Curve:.

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Income Elasticity of Demand

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  1. Income Elasticity of Demand And Cross-Price Elasticity of Demand

  2. Income Elasticity of Demand EI = %  Qd / %  Id Measures the sensitivity of DEMAND to changes in disposable income.

  3. Engel Curve: Shows the relationship between quantity demanded and disposable income given a constant price.

  4. Engel Curve: Normal Good Disposable Income Engel Curve for a Normal Good EI > 0 Qd/ut

  5. Luxury Goods Luxury Goods are Normal Goods but they have an EI >= 1 Quantity demanded is very senstive to changes in disposable income

  6. “Necessities” “Necessities” are Normal Goods but 0 < EI < 1 Quantity demand is not very sensitive to changes in disposable income

  7. Engel Curve: Inferior Good Disposable Income Engel Curve for an Inferior Good EI < 0 Qd/ut

  8. Normal Goods (EI >0) • Luxury Goods (EI >= 1) • Necessitites (0 < EI < 1) • Inferior Goods (EI < 0)

  9. Some Income Elasticities Beef +.29 Pork +.13 Chicken +.18 Milk +.20 All foods +.18 Non foods +1.25

  10. Cross-Price Elasticity Measures how sensitive DEMAND for a commodity is to changes in the price of a substitute or compliment commodity

  11. Cross-Price Elasticity Ecp of x,y = %  Qx / %  Py

  12. Cross-Price Elasticity Ecp > 0  Substitute Ecp < 0  Compliment Ecp = 0  Independent

  13. Example: The Cross-Price Elasticity of Beef and Pork would be calculated as: Ecp, Beef, Pork = %  QBeef / %  PPork

  14. Example The Cross-Price Elasticity of Pork and Beef would be calculated as: Ecp, Pork, Beef = %  QPork / %  PBeef

  15. Interpretation? If the Ecp, Pork, Beef = + .65 Then for every 1% increase in the price of beef, the Qd of pork would increase .65%. We also would know that pork and beef are substitutes

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