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Income Elasticity of Demand-Worksheet

Income Elasticity of Demand measures how the quantity demanded of goods changes in response to changes in consumer income, distinguishing between normal and inferior goods. The calculation involves comparing percentage changes in quantity demanded and income, with positive values indicating normal goods and negative values indicating inferior goods. Examples and practice questions illustrate the application of this concept.

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145 views2 pages

Income Elasticity of Demand-Worksheet

Income Elasticity of Demand measures how the quantity demanded of goods changes in response to changes in consumer income, distinguishing between normal and inferior goods. The calculation involves comparing percentage changes in quantity demanded and income, with positive values indicating normal goods and negative values indicating inferior goods. Examples and practice questions illustrate the application of this concept.

Uploaded by

lgugeneralnatividad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Income Elasticity of Demand

CONCEPT: INCOME ELASTICITY OF DEMAND

● Income Elasticity of Demand helps us understand whether goods are normal goods or inferior goods.

Income Elasticity of Demand: How does quantity demanded respond to a change in consumer income?

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 (%∆) 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑


𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 (%∆) 𝑖𝑛 𝐼𝑛𝑐𝑜𝑚𝑒

□ We still use the __________________________ in this calculation!


□ For Income Elasticity of Demand, positive and negative answers make a difference!

Steps for calculating Income Elasticity of Demand:


1. Subtract the two quantities and subtract the two incomes.
2. Sum the two quantities and sum the two incomes.
3. Divide your Quantity Sum by two. Divide your Income Sum by two.
4. Divide your answers from Steps 1 and 3. (Step 1 ÷ Step 3 for both quantity and income)
5. Divide your answers from Step 4. (Quantity ÷ Income)
6. Decide whether quantity and income increased/decreased (+/-)

EXAMPLE: At a price of $75 per serving of caviar, the quantity demanded is 9,000. Although price did not change,
consumer income increased from $950 per week to $1,050 per week, causing the quantity demanded to increase to 11,000.
What is the income elasticity of demand for caviar?

□ The income elasticity of demand helps us determine the type of product:


- Positive and greater than 1 (income elastic) à Normal Good, Luxury
- Positive and less than 1 (income inelastic) à Normal Good, Necessity
- Negative à Inferior Good

Page 1
Income Elasticity of Demand

PRACTICE: Johnny Clutch just got a raise from $900 per week to $1100 per week. As a result, he decreases the amount of
ramen noodles he buys from seven cartons a week to one carton a week. For Johnny, ramen noodles are:

a) Normal Goods, Necessity


b) Normal Goods, Luxury
c) Inferior Goods
d) Substitute Goods

PRACTICE: Johnny Clutch just got a raise from $950 per week to $1,050 per week. As a result, he increases the number of
concerts he attends by five percent. His demand for concerts is:

a) Income elastic
b) Income inelastic
c) A horizontal line
d) A vertical line

PRACTICE: A twelve percent increase in consumer income has caused the quantity of orange juice demanded to increase
from 24,000 to 26,000. The income elasticity of demand for orange juice is:

a) 0.25
b) 0.33
c) 0.50
d) 0.67

Page 2

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