In economics, the income elasticity of demand (YED) is the responsivenesses of the quantity demanded for a good to a change in consumer income. It is measured as the ratio of the percentage change in quantity demanded to the percentage change in income. For example, if in response to a 10% increase in income, quantity demanded for a good or service were to increase by 20%, the income elasticity of demand would be 20%/10% = 2.0.
The point elasticity version, which defines it as an instantaneous rate of change of quantity demanded as income changes, is as follows. For a given Marshallian demand function with arguments income and a vector of prices of all goods,
This can be rewritten in the form
For discrete changes the elasticity is (using the arc elasticity)
where subscripts 1 and 2 refer to values before and after the change.
The most commonly used elasticity in economics, the price elasticity of demand, is almost always negative, but many goods have positive income elasticities, many have negative.
Income elasticity of demand can be used as an indicator of future consumption patterns and as a guide to firms' investment decisions. For example, the "selected income elasticities" below suggest that as incomes increase over time, an increasing portion of consumers' budgets will be devoted to purchasing automobiles and restaurant meals and a smaller share to tobacco and margarine. [1]
Income elasticities of demand for gasoline and diesel have been studied extensively, however, elasticities vary widely between studies. Estimates for income elasticities of demand for gasoline in developed economies range from 0.66 to 1.26. [10]
Being a normal good (elasticity > 0) means that with higher income, consumption of the good will rise, but it does not mean that the good's share of the consumer's budget will rise with income. That depends on whether the elasticity is below or above +1. If the elasticity is negative, such as margarine's -.20 (from the "Selected income elasticities" section of this article), then it is obvious that margarine's share of the consumer's budget will fall if his income rises 10%. If the elasticity is tobacco's +.42, however, an income increase of 10% generates a spending increase of 4.2%, so tobacco's share of the budget falls. His purchases of books, with an elasticity of +1.44, will rise 14.4%, however, and so will have a higher budget share after his income rises.
In aggregate, food has an income elasticity of demand between zero and one, so expenditure increases with income, but not as fast as income does. This observation is known as Engel's law.
Income elasticities are closely related to the population income distribution and the fraction of the product's sales attributable to buyers from different income brackets. When buyers in a certain income bracket get a pay raise, the income elasticity can be used to predict how much more the market will consume of that product. If the income share elasticity is defined as the negative percentage change in individuals given a percentage increase in income bracken the income-elasticity, after some computation, becomes the expected value of the income-share elasticity with respect to the income distribution of purchasers of the product. When the income distribution is described by a gamma distribution, the income elasticity is proportional to the percentage difference between the average income of the product's buyers and the average income of the population. [11]
Income elasticities can vary as household income changes, particularly in the case of goods and commodities such as food and energy. [6] At low levels of per capita income, elasticities of demand for food, energy, or other products can be high. As per capita income increases, however, income elasticities fall. At high levels, the marginal elasticities may go to zero, or even negative. [12] These differences can be observed by comparing countries at different income levels. For example, estimates of the income elasticity of cereals ranges from 0.62 in Tanzania to 0.47 in Georgia, 0.28 in Slovenia, and 0.05 in the United States. [13]
The decline in elasticities as income increases is a form of Kuznet's curve. As economies industrialize and get wealthier, consumer demand changes. At low levels of income, demand for energy or other goods increases very rapidly. However, as income rises further, consumption requirements (e.g. for food or energy) are increasingly satisfied. In addition, consumption patterns shift toward services rather than goods, which require fewer commodities to produce.
In economics, profit maximization is the short run or long run process by which a firm may determine the price, input and output levels that will lead to the highest possible total profit. In neoclassical economics, which is currently the mainstream approach to microeconomics, the firm is assumed to be a "rational agent" which wants to maximize its total profit, which is the difference between its total revenue and its total cost.
In economics, elasticity measures the responsiveness of one economic variable to a change in another. If the price elasticity of the demand of something is -2, a 10% increase in price causes the quantity demanded to fall by 20%. Elasticity in economics provides an understanding of changes in the behavior of the buyers and sellers with price changes. There are two types of elasticity for demand and supply, one is inelastic demand and supply and the other one is elastic demand and supply.
A good's price elasticity of demand is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good, but it falls more for some than for others. The price elasticity gives the percentage change in quantity demanded when there is a one percent increase in price, holding everything else constant. If the elasticity is −2, that means a one percent price rise leads to a two percent decline in quantity demanded. Other elasticities measure how the quantity demanded changes with other variables.
In economics, the crosselasticity of demand measures the effect of changes in the price of one good on the quantity demanded of another good. This reflects the fact that the quantity demanded of good is dependent on not only its own price but also the price of other "related" good.
In economics, a normal good is a type of a good which experiences an increase in demand due to an increase in income, unlike inferior goods, for which the opposite is observed. When there is an increase in a person's income, for example due to a wage rise, a good for which the demand rises due to the wage increase, is referred as a normal good. Conversely, the demand for normal goods declines when the income decreases, for example due to a wage decrease or layoffs.
In microeconomics, substitute goods are two goods that can be used for the same purpose by consumers. That is, a consumer perceives both goods as similar or comparable, so that having more of one good causes the consumer to desire less of the other good. Contrary to complementary goods and independent goods, substitute goods may replace each other in use due to changing economic conditions. An example of substitute goods is Coca-Cola and Pepsi; the interchangeable aspect of these goods is due to the similarity of the purpose they serve, i.e. fulfilling customers' desire for a soft drink. These types of substitutes can be referred to as close substitutes.
In economics and particularly in consumer choice theory, the income-consumption curve is a curve in a graph in which the quantities of two goods are plotted on the two axes; the curve is the locus of points showing the consumption bundles chosen at each of various levels of income.
In microeconomics, the law of demand is a fundamental principle which states that there is an inverse relationship between price and quantity demanded. In other words, "conditional on all else being equal, as the price of a good increases (↑), quantity demanded will decrease (↓); conversely, as the price of a good decreases (↓), quantity demanded will increase (↑)". Alfred Marshall worded this as: "When we say that a person's demand for anything increases, we mean that he will buy more of it than he would before at the same price, and that he will buy as much of it as before at a higher price". The law of demand, however, only makes a qualitative statement in the sense that it describes the direction of change in the amount of quantity demanded but not the magnitude of change.
In economics, a complementary good is a good whose appeal increases with the popularity of its complement. Technically, it displays a negative cross elasticity of demand and that demand for it increases when the price of another good decreases. If is a complement to , an increase in the price of will result in a negative movement along the demand curve of and cause the demand curve for to shift inward; less of each good will be demanded. Conversely, a decrease in the price of will result in a positive movement along the demand curve of and cause the demand curve of to shift outward; more of each good will be demanded. This is in contrast to a substitute good, whose demand decreases when its substitute's price decreases.
A demand curve is a graph depicting the inverse demand function, a relationship between the price of a certain commodity and the quantity of that commodity that is demanded at that price. Demand curves can be used either for the price-quantity relationship for an individual consumer, or for all consumers in a particular market.
Utility maximization was first developed by utilitarian philosophers Jeremy Bentham and John Stuart Mill. In microeconomics, the utility maximization problem is the problem consumers face: "How should I spend my money in order to maximize my utility?" It is a type of optimal decision problem. It consists of choosing how much of each available good or service to consume, taking into account a constraint on total spending (income), the prices of the goods and their preferences.
In microeconomics, a consumer's Marshallian demand function is the quantity they demand of a particular good as a function of its price, their income, and the prices of other goods, a more technical exposition of the standard demand function. It is a solution to the utility maximization problem of how the consumer can maximize their utility for given income and prices. A synonymous term is uncompensated demand function, because when the price rises the consumer is not compensated with higher nominal income for the fall in their real income, unlike in the Hicksian demand function. Thus the change in quantity demanded is a combination of a substitution effect and a wealth effect. Although Marshallian demand is in the context of partial equilibrium theory, it is sometimes called Walrasian demand as used in general equilibrium theory.
In microeconomics, the Slutsky equation, named after Eugen Slutsky, relates changes in Marshallian (uncompensated) demand to changes in Hicksian (compensated) demand, which is known as such since it compensates to maintain a fixed level of utility.
The Marshall–Lerner condition is satisfied if the absolute sum of a country's export and import demand elasticities is greater than one. If it is satisfied, then if a country begins with a zero trade deficit then when the country's currency depreciates, its balance of trade will improve. The country's imports become more expensive and exports become cheaper due to the change in relative prices, and the Marshall-Lerner condition implies that the indirect effect on the quantity of trade will exceed the direct effect of the country having to pay a higher price for its imports and receive a lower price for its exports.
Elastic energy is the mechanical potential energy stored in the configuration of a material or physical system as it is subjected to elastic deformation by work performed upon it. Elastic energy occurs when objects are impermanently compressed, stretched or generally deformed in any manner. Elasticity theory primarily develops formalisms for the mechanics of solid bodies and materials. The elastic potential energy equation is used in calculations of positions of mechanical equilibrium. The energy is potential as it will be converted into other forms of energy, such as kinetic energy and sound energy, when the object is allowed to return to its original shape (reformation) by its elasticity.
A relative price is the price of a commodity such as a good or service in terms of another; i.e., the ratio of two prices. A relative price may be expressed in terms of a ratio between the prices of any two goods or the ratio between the price of one good and the price of a market basket of goods. Microeconomics can be seen as the study of how economic agents react to changes in relative prices, and of how relative prices are affected by the behavior of those agents. The difference and change of relative prices can also reflect the development of productivity.
In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given time. The relationship between price and quantity demand is also called the demand curve. Demand for a specific item is a function of an item's perceived necessity, price, perceived quality, convenience, available alternatives, purchasers' disposable income and tastes, and many other options.
In economics, supply is the amount of a resource that firms, producers, labourers, providers of financial assets, or other economic agents are willing and able to provide to the marketplace or to an individual. Supply can be in produced goods, labour time, raw materials, or any other scarce or valuable object. Supply is often plotted graphically as a supply curve, with the price per unit on the vertical axis and quantity supplied as a function of price on the horizontal axis. This reversal of the usual position of the dependent variable and the independent variable is an unfortunate but standard convention.
In microeconomics, a monopoly price is set by a monopoly. A monopoly occurs when a firm lacks any viable competition and is the sole producer of the industry's product. Because a monopoly faces no competition, it has absolute market power and can set a price above the firm's marginal cost.
Anelasticity is a property of materials that describes their behaviour when undergoing deformation. Its formal definition does not include the physical or atomistic mechanisms but still interprets the anelastic behaviour as a manifestation of internal relaxation processes. It is a behaviour differing from elastic behaviour.
