Microeconomics for Beginners - Week 4_Video 4 - Income & Cross Elasticity of Demand

Summary

This video provides an introduction to income and cross elasticity of demand in microeconomics. It explains income elasticity, which measures how demand for a good changes with income, and cross elasticity, which assesses how the demand for one good is affected by the price change of another related good. The video outlines the formulas for both elasticities, discusses the types of goods (normal, luxury, inferior, substitutes, and complements), and provides examples to illustrate these concepts. By the end, viewers will understand how to interpret the values of both income and cross elasticity of demand.

Takeaways

• 😀 Income elasticity of demand (YED) measures the change in quantity demanded of a good due to a change in the consumer's income.
• 😀 The formula for income elasticity of demand is: (percentage change in quantity demanded) / (percentage change in income).
• 😀 A positive income elasticity of demand indicates a normal good, where demand increases as income rises.
• 😀 If the income elasticity is between 0 and 1, the good is considered a necessity, as the demand increases slower than the income.
• 😀 If the income elasticity is greater than 1, the good is considered a luxury, where demand increases faster than income.
• 😀 Negative income elasticity of demand refers to inferior goods, where demand decreases as income increases.
• 😀 Cross elasticity of demand (XED) measures how the quantity demanded of one good changes in response to a price change of another good.
• 😀 A positive cross elasticity indicates that two goods are substitutes, meaning if the price of one increases, the demand for the other increases.
• 😀 A negative cross elasticity indicates that two goods are complements, meaning if the price of one increases, the demand for the other decreases.
• 😀 Zero cross elasticity means the two goods are unrelated, meaning a change in the price of one does not affect the demand for the other.
• 😀 The video encourages learners to understand and interpret the implications of income and cross elasticity of demand with real-world examples.

Q & A

What is income elasticity of demand?

Income elasticity of demand is the proportionate change in the quantity demanded of a commodity due to a proportionate change in the income of the consumer. It is mathematically expressed as the percentage change in quantity demanded divided by the percentage change in income.

How is the formula for income elasticity of demand expressed?

The formula for income elasticity of demand is ΔQ / ΔY * Y / Q, where ΔQ represents the change in quantity demanded, ΔY is the change in income, Q is the initial quantity demanded, and Y is the initial income of the consumer.

What does a positive income elasticity value indicate?

A positive income elasticity value indicates that the good is a normal good. If the value is between 0 and 1, it is considered a necessity good, meaning that the demand for the good increases with income, but at a slower rate.

What does it mean if the income elasticity is greater than 1?

If the income elasticity is greater than 1, the good is considered a luxury good. This means that as income increases, the demand for the good increases at a higher rate, and a greater fraction of income is spent on the luxury good.

What does a negative income elasticity indicate?

A negative income elasticity indicates that the good is an inferior good. This occurs when an increase in income leads to a decrease in demand for the good, as consumers shift to higher-quality alternatives.

What is cross elasticity of demand?

Cross elasticity of demand is the proportionate change in the quantity demanded of one good due to a proportionate change in the price of another related good. It helps determine whether two goods are substitutes, complements, or unrelated.

How is the formula for cross elasticity of demand expressed?

The formula for cross elasticity of demand is ΔQ1 / ΔP2 * P2 / Q1, where ΔQ1 represents the change in the quantity demanded of good 1, ΔP2 is the change in the price of good 2, P2 is the initial price of good 2, and Q1 is the initial quantity demanded of good 1.

What does a positive cross elasticity value signify?

A positive cross elasticity value indicates that the two goods are substitutes. This means that an increase in the price of one good leads to an increase in the demand for the other good.

What does a negative cross elasticity value signify?

A negative cross elasticity value indicates that the two goods are complements. This means that an increase in the price of one good leads to a decrease in the demand for the other good.

What does a cross elasticity value of zero indicate?

A cross elasticity value of zero indicates that the two goods are unrelated. This means that a change in the price of one good has no effect on the demand for the other good.