Theory question 102
ElasticitySection A (answer one question only from this section)
(a) What is income elasticity of demand? The table below shows the various incomes and demand for different commodities.
Income (N) | Quantity Demanded (Kg)
A 20,000 | 120
B 36,000 | 96
C 40,000 | 160
D 44,000 | 200
E 45,000 | 240
F 47,000 | 252
(b) Calculate the income elasticity between (i) A and B (ii) C and D (iii) E and F
(c) What kind of good is between (i) A and B? (ii) C and D?
Show the model answer
(a) Income elasticity of demand is the degree of responsiveness of quantity demanded to a change in consumers' income: YED = % change in quantity demanded ÷ % change in income.
(b)(i) A to B: quantity falls 120 → 96 = −24/120 × 100 = −20%; income rises 20,000 → 36,000 = 16,000/20,000 × 100 = 80%; YED = −20 ÷ 80 = −0.25.
(ii) C to D: quantity 160 → 200 = 40/160 × 100 = 25%; income 40,000 → 44,000 = 4,000/40,000 × 100 = 10%; YED = 25 ÷ 10 = 2.5.
(iii) E to F: quantity 240 → 252 = 12/240 × 100 = 5%; income 45,000 → 47,000 = 2,000/45,000 × 100 ≈ 4.44%; YED = 5 ÷ 4.44 ≈ 1.13.
(c)(i) A and B: negative YED, so an inferior good.
(ii) C and D: positive and greater than 1, so a normal good (a luxury, income-elastic).
Use the first figure of each pair as the base; the sign of the answer tells you the kind of good.