Introduction/Possible Activities:

If I had more money, what things would I buy LESS?

Previous lessons on elasticity have focused solely on how sensitive buyers are to its price or that of another good. They are also income-sensitive, meaning that changes to their income will change their buying behavior.

As we broaden our concept of elasticity to "buyer sensitivity" you should notice the connection between the foundations of the Law of Demand, the determinants of demand, and the elasticities studied here.

To that end...
Foundation of the Law of Demand
Related Shift Factor
Corresponding Elasticity
Marginal Utility
Price Elasticity
Substitution Effect
Cross-Price Elasticity
Income Effect
Income of Buyers (Normal/Inferior Goods)
Income Elasticity

This lesson will focus on Income Elasticity. It will explain what it is, how to calculate it, and how to interpret the results. In general, we use income elasticity to determine whether good are normal or inferior. Most goods are normal, meaning we buy more of them when our income increases, less when it decreases. Some goods are inferior, meaning we buy less of them when our income increases.

Although it's often obvious from a logical perspective, sometimes the normal-inferior question is not as easily answered. For example, if you're nearly starving, hot dogs are probably a normal good, but for a wealthy person they may be an inferior good. The question is typically about how they are viewed by society overall. To that end, we need to calculate a value for income elasticity to reveal the buying patterns in the market.

You should find the concepts and calculations here are very similar to price and cross-price elasticity. In fact, the most difficult part is correctly interpreting a scenario and choosing the correct method. The red flag you will look for that signals you to use income-price elasticity is that the causual indicator is change in income, as opposed to price of that or another good. For example, consider the the prompt, "Suppose consumers get a raise and they respond by buying more iPhone 5s and fewer iPhone 4. What kind of goods are these?" Students often carelessly jump to "related goods." If the price of one of the iPhones had changed, that would be the case, but it was the income of the buyers that changed, which is why this is a normal/inferior question.

II. Students should understand how a market economy determines prices and the role prices place in rationing scarce goods and services.
A. Students should be able to demonstrate understanding of elasticity by:
1. Defining elasticity of demand.
2. Calculating elasticity using:
b. coefficient method
7. Defining & calculating income elasticity.

Learning Activities:
1. Watch the video below and take notes.

2. Complete the following worksheet after having watched the video. Try from memory first before using your notes:


Remediation Checklist:
  • Re-read text.