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Income elasticity of demand | APⓇ Microeconomics | Khan Academy - YouTube
Channel: Khan Academy
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in previous videos we have talked about
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the idea of price elasticity and it
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might have been price elasticity of
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demand or price elasticity of supply but
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in both situations we were talking about
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our percent change
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in
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quantity
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over
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our percent
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change
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in price if we were talking about price
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elasticity of demand it would be the
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percent change in quantity demanded over
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the percent change in price and if we're
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talking about price elasticity of supply
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it would be our percent change in
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quantity supplied over a percent change
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in price and as we talked about in many
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videos this is a way of measuring how
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sensitive is quantity demanded or
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supplied to a change in price what we're
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going to see in this video is that this
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is not the only type of elasticity that
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economists will look at there are many
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types of elasticity where they want to
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see how sensitive is one thing to
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another for example you could look at
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the percent change
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percent
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change
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in labor supply
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so you could say quantity of labor that
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would be our labor supply
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divided by our percent
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change
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in wages i'll just write it out wages
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and you could view that as our percent
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change in the price of labor so you
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might say hey this is just a price
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elasticity of supply being particular to
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the labor market but you can even see
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things and we'll have a whole video
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about this probably my next video that i
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will make where you could have the
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percent
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change
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in let's say quantity is demanded of one
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good divided by so let me call it good
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one divided by the percent
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change in price of not that good then we
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would have price elasticity but of
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good
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two
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and so this is actually thinking about
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how good one is a substitute for the
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other and we'll go into a lot more depth
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there but the focus of this video as you
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can imagine because it was already
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written down in a clean font right over
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here is income elasticity and here we're
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going to think about the income
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elasticity of demand and you could
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imagine what that would be this is going
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to be our percent
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change
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in
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quantity demanded
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demanded divided by instead of thinking
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about the percent change in price of
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that good or the service we're going to
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think about the percent
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change
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change
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in income
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of the people who might be in the market
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for that good so normally you would
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expect that when our percent change in
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income goes up
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that the same thing would happen to our
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percent change in quantity demanded for
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example let's say we're talking about
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the market for vacations well as as my
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income goes up as most people's incomes
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go up they might be able to afford
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larger or better vacations and that
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would be a normal good so this is a
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situation of a normal good
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normal good just as what you would
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expect
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but you could actually have the other
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way around
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you could imagine a situation where even
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though
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you have an increase in your percent
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change
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in income
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that does not lead to an increase in
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your percent change in quantity demanded
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in fact it could lead to a decrease in
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the percent
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change
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quantity demanded or another way of
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thinking about it your quantity demanded
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could actually go down so you would have
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a negative
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a negative percent change right over
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here now can you imagine any situations
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like that
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well imagine if we're talking about the
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market for car mechanic services
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as people have more income they might be
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able to afford better cars that are more
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reliable that break down less and then
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they would have to go to the car
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mechanic less and so that situation
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where our demand would actually go down
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when our income goes up or our percent
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change will become negative when we have
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a positive percent change in income that
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would be that is known as an inferior
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good
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inferior
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good
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so there's two big things to take away
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one you don't just have to think about
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price elasticity of supply or demand
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there are other types of elasticities
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but just to hit the point home on income
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elasticity let's look at a few examples
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so we're told suppose that when people's
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income increases by twenty percent they
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buy ten percent less fast food in this
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situation what type of good would fast
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food be pause this video and think about
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it
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well their income is increasing but
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their demand is decreasing so that's the
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situation we just talked about this is
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an inferior good in
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fear you're good
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and for kicks what is the income
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elasticity of demand right over here
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calculate that
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so just remember our
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income elasticity of demand
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is just going to be our percent
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change
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in quantity demanded
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divided by our percent
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change instead of price we're going to
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say
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in income i'll just write percent change
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of income which is going to be what well
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we know our percent change in income it
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went up by 20 percent
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in this example and what happened to our
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quantity demanded well it went down by
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10 so negative 10
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and so here you have an income
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elasticity of demand of negative
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one-half or negative 0.5 let's do
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another example
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suppose we knew that when people's
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income increased by five percent in a
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country the demand for health care
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increased by ten percent
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what kind of good do people consider
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health care normal or inferior
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so first calculate the income elasticity
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of demand for this example and then
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answer these questions
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all right so first
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we are our income elasticity of demand
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let's see when our income increases by
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five percent so we have a five percent
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increase in income our demand for
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healthcare increases by 10
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our demand for health care increases by
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10 percent so we get a positive income
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elasticity of demand and so in general
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if this thing is positive you're dealing
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with a normal good as income goes up
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then you similar see quantity demand
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quantity demanded going up
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so this is a normal good
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