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Main content
Current time:0:00Total duration:7:05
AP.MICRO:
MKT‑3 (EU)
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MKT‑3.E (LO)
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MKT‑3.E.10 (EK)
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MKT‑3.E.9 (EK)

Video transcript

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 were talking about price elasticity of demand it would be the percent change in quantity demanded over the percentage City of supply it be our percent change in quantity supplied over a 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 our percent change in the price of labor so you might say hey this is just a price elasticity of supply being particularly 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 is 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 saying 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 is 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 surface we're gonna think about the percent change change in income of the people who might be in the market for that good so 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 R talk about the market for vacations well as as my income goes up as most people's incomes go up they might be able to afford larger or better vacations and that would be a normal good so this is a situation of a normal good normal good just is 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 can you imagine 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 in income that would be that is known as and inferior good inferior good so 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 elasticity's but just to hit the point home on income elasticity let's look at a few examples so we're told suppose that when people's income increases by 20% they buy 10 percent 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 so that's the situation we just talked about this is an inferior good in fear you're good and for kicks what is the income elasticity of demand right over here calculate that so 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 or SI in income that's right percent change of income which is going to be what well we know our percent change in income it went up by 20 percent in this example and what happened to our quantity demanded well it went down by 10 percent so negative 10 percent and so here you have an income elasticity of demand of negative 1/2 or negative 0.5 let's do another example suppose we knew that when people's income increased by 5 percent in a country the demand for healthcare increased by 10 percent what kind of good do people consider healthcare normal or inferior so 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% we have a 5% increase in income our demand for healthcare in by 10% our demand for health care 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 similar see quantity demand quantity demanded going up so this is a normal good