Question

2. Suppose you got a considerable raise from your current work. You realize that this dramatic increase in income has altered your change in quantity demanded for different types of good. You remember taking microeconomics and mastering the topic of income elasticity. The income elasticity of demand refers to the change in quantity demanded to the results from a change in the buyer’s income, not the price of the good.   
   1. How would this increase in income affect your consumption of all goods? (Expensive, regular, and cheap goods)
   2. Explain each case using income elasticity.
   3. Provide an example for each case.
   4. Provide a numeric guess what you think each value of income elasticity would be for each of your examples.

Answer 1

Answer -

1 - Cheap goods - These can also be called the inferior goods. The relation between the income and the demand for the inferior goods is inversely related. Thus , the income increase will lead to fall in demand of these goods and vice a versa. The income elasticity of these good will be Less Than 1.

2 - The regular goods will have the unit income elasticity. The income elasticity will be Equal To 1 or greater than 1. Thus , the change in demand for these goods will be equal to the level of change in income or greater than the level of change in income. These are also called the normal goods.

3 - Expensive good - The income elasticity of these goods will be elastic in nature. The income elasticity of these goods is greater than 1 and is directly proportional to the change in the level of income.

The income elasticity can be determined by the formula of % change in demand / % change in income