Question

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.

-How would this increase in income affect your consumption of all goods? (Expensive, regular, and cheap goods)

-Explain each case using income elasticity.

-Provide an example for each case.

-Provide a numeric guess what you think each value of income elasticity would be for each of your examples.

Answer 1

Luxury or Expensive Good

A luxury good means an increase in income causes a bigger percentage increase in demand. It means that the income elasticity of demand is greater than one. For example, HD TV’s would be a luxury good. When income rises, people spend a higher percentage of their income on the luxury good. So, with increase in my income my consumption of expensive goods will increase.

Normal Goods

A normal good means an increase in income causes an increase in demand. It has a positive income elasticity of demand. A normal good can be income elastic or income inelastic. With the increase in my income my consumption for normal goods will increase.Examples include ordinary broadband, ordinary tv license, Ford Focus car, holiday to somewhere close to where you live.

Inferior Goods

An inferior good means an increase in income causes a fall in demand. It is a good with a negative income elasticity of demand. As my income Increaes my demand for inferior goods will Decrease.Example Bus travel, visit at local theme park.

Normal Good

Income Elasticity of demand will be greater than 0. It can be 0.5.

Luxury Good

Income Elasticity of Demand will be greater than 1. It can be 2.

Inferioir good

Income Elasticity of Demand will be less than 0. It can be -1.