Video transcript
- [Instructor] In previous videos, we have talked about theidea of price elasticity, and it might have beenprice elasticity of demand or price elasticity of supply. But in both situations,we were talking about our percent change in quantity over our percent change in price. If we're talking aboutprice elasticity of demand, it would be the percentchange in quantity demanded over the percent change in price. And if we're talking aboutprice elasticity of supply, it would be our percentchange in quantity supplied over percent change in price. And as we talked about in many videos, this is a way of measuring how sensitive is quantitydemanded or supplied to a change in price. What we're going to seein this video is that this is not the only type of elasticity that economists will look at. There are many types of elasticity, where they want to see "How sensitive is one thing to another?" For example, you could look at the percent change, percent change in labor supply, so you could say quantity of labor, that would be our labor supply, divided by our percent change in wages. I'll just write it out, wages. And you could view that as a percent change in the price of labor. You might say, "Hey, thisis just a price elasticity "of supply being particularto the labor market." But you can even see things, and we'll have a whole video about this, probably my next video that I will make, where you could havethe percent change in, let's say quantity demanded of one good divided by, so let me call it good one divided by the percent change in price of not that good, then wewould have price elasticity, but of good two. And so this is actually, thinking about how good oneis a substitute for the other, and we'll go into a lot more depth there. But the focus of this video, as you can imagine becauseit was already written down in a clean font right over here is Income Elasticity. And here, we're gonna think about the income elasticity of demand. And you could imagine what that would be. This is going to be our percent change in quantity demanded, demanded, divided by, instead of thinking about the percent change in price of that good or the service, we're going to thinkabout the percent change, change, in income of the peoplewho might be in the market for that good. Normally you would expectthat when our percent change in income goes up, that the same thing wouldhappen to our percent change in quantity demanded. For example, let's say we're talking about the market for vacations, well, as my income, as mostpeople's incomes go up, they might be able to affordlarger or better vacations. And that would be a normal good. This is a situation of a normal good. Normal good, just aswhat you would expect. But you could actuallyhave the other way around. You could imagine a situation where even though you have an increase in your percent change in income, that does not lead to anincrease in your percent change in quantity demanded. In fact, it could lead to adecrease in the percent change in quantity demanded. Or another way of thinking about it, your quantity demandedcould actually go down, so you would have a negative, a negative percent change right over here. Now could you image anysituations like that? Well, imagine if we'retalking about the market for car mechanic services. As people have more income, they might be able to afford better cars that are more reliable, that break down less, and then they would have togo to the car mechanic less. And so that situation, where our demand would actually go down when our income goes up, or our percent change will become negative when we have a positivepercent change income, that would be, that isknown as an inferior good. Inferior good. There's two big things to take away. One, you don't just have tothink about price elasticity of supply or demand, there are other types of elasticities. But just to hit the pointhome on income elasticity, let's look at a few examples. We're told: suppose that when people's income increases by 20%, they buy 10% less fast food. In this situation, what typeof good would fast food be? Pause this video and think about it. Well, their income is increasing but their demand is decreasing. That's the situation we just talked about. This is an inferior good. Inferior good. And for kicks, what isthe income elasticity of demand right over here, calculate that. Just remember, our incomeelasticity of demand is just going to be our percent change in quantity demanded divided by our percent change, instead of price, we're going to say in income. I'll just write percent change of income, which is going to be what? Well, we know ourpercent change in income. It went up by 20% in this example, and what happened toour quantity demanded? Well, it went down by10%, so negative 10%. And so here you have anincome elasticity of demand of negative one half, or negative 0.5. Let's do another example. Suppose we knew that when people's income increasedby 5% in a country, the demand for healthcareincreased by 10%. What kind of good do people consider healthcare: Normal or inferior? First, calculate theincome elasticity of demand for this example, and thenanswer these questions. All right, so first we are, our income elasticity of demand. Let's see, when ourincome increases by 5%, so we have a 5% increase in income, our demand for healthcareincreases by 10%. Our demand for healthcareincreases by 10%, so we get a positive incomeelasticity of demand. And so in general, ifthis thing is positive, you're dealing with a normal good. As income goes up, then you similarly seequantity demanded going up. This is a normal good.
