- [Instructor] In previous videos,
we have talked about the idea of price elasticity,
and it might have been price 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 about price elasticity of demand,
it would be the percent change in quantity demanded
over the percent change in price.
And if we're talking about price elasticity of supply,
it would be our percent change 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 quantity demanded or supplied
to a change in price.
What we're going to see in 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, this is just a price elasticity
"of supply being particular to 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 have the 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 we would have price elasticity,
but of good two.
And so this is actually,
thinking about how good one is 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 because it 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 think about the percent change,
change,
in income of the people who might be in the market
for that good.
Normally you would expect that when our percent change
in income goes up,
that the same thing would happen 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 most people's incomes go up,
they might be able to afford larger or better vacations.
And that would be a normal good.
This is a situation of a normal good.
Normal good, just as what you would expect.
But you could actually have 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 an increase in your percent change
in quantity demanded.
In fact, it could lead to a decrease in the percent change
in quantity demanded.
Or another way of thinking about it,
your quantity demanded could actually go down,
so you would have a negative,
a negative percent change right over here.
Now could you image any situations like that?
Well, imagine if we're talking 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 to go 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 positive percent change income,
that would be, that is known as an inferior good.
Inferior good.
There's two big things to take away.
One, you don't just have to think about price elasticity
of supply or demand,
there are other types of elasticities.
But just to hit the point home 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 type of 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 is the income elasticity
of demand right over here, calculate that.
Just remember, our income elasticity 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 our percent change in income.
It went up by 20% in this example,
and what happened to our quantity demanded?
Well, it went down by 10%, so negative 10%.
And so here you have an income elasticity of demand
of negative one half, or negative 0.5.
Let's do another example.
Suppose we knew that when
people's income increased by 5% in a country,
the demand for healthcare increased by 10%.
What kind of good do people
consider healthcare: Normal or inferior?
First, calculate the income elasticity of demand
for this example, and then answer these questions.
All right, so first
we are, our income elasticity of demand.
Let's see, when our income increases by 5%,
so we have a 5% increase in income,
our demand for healthcare increases by 10%.
Our demand for healthcare increases by 10%,
so we get a positive income elasticity of demand.
And so in general, if this thing is positive,
you're dealing with a normal good.
As income goes up,
then you similarly see quantity demanded going up.
This is a normal good.