Income Elasticity DR. BUCKLEY: This is Dr. Buckley, and in this video, we're going to be talking about income elasticity. Suppose you win the lottery. You'll probably be willing to buy a lot more of the things you really like. So you might be willing to take more vacations, buy more cars. And you might buy less of the things that you don't really like, like Ramen noodles, or perhaps coach seats on an airplane. So we could think about this response-- this change in your quantity demanded of a good in response to a change in your income-- and we call it income elasticity. So we have this formula for income elasticity, where we put the percentage change in income on the bottom. And on top, we put your percent change in quantity demanded to that change in income. So we might find, if your income goes up by 12%, your quantity demanded of movies might go up by 16%. So we can use that to calculate the income elasticity for movies. So we put 16% divided by 12%. So a positive divided by a positive is a positive. 16 divided by 12 is 1.33, and the percent signs cancel out. So your income elasticity for movies would be positive 1.33. We could think about how an increase in your income might affect your purchases of Ramen noodles. So let's say a 12% increase in your income leads you to buy 9% less Ramen noodles. So we use that to calculate the income elasticity-- the negative 9% divided by 12%. So a negative divided by a positive is a negative. 9 divided by 12 is 0.75, and the percent signs cancel out. So your income elasticity for Ramen noodles would be negative 7.5. So you have income elasticity, and we have our two elasticities that we've calculated right next to each other. And we could see that one has a positive sign and one has a negative sign. For movies, you got richer and you bought more of it. For Ramen noodles, you got richer and you bought less of it. So that implies that movies are a normal good and Ramen noodle is an inferior good. So anytime you calculate an elasticity, the sign will tell you the direction of the relationship. A positive sign means that these things move in the same direction. When you get richer, you buy more of it. Or when you get poorer, you buy less of it, i.e. a normal good. And a negative sign for an income elasticity means that these things move in the opposite direction. You get richer, and you buy less of it. Or you get poorer, and you buy more of it. In this case, that would mean an inferior good. So once we get rid of the signs, we can think about the size of these numbers. Well, movies is a bigger number than the elasticity for Ramen noodle. So once we think about the sign, we can get rid of it. And then we can think about the size of the number, and bigger numbers imply more responsive to income. So for movies, because this number is greater than 1, this is sometimes called a superior good. It's not just that you get 10% richer, it's that when you get 10% richer, you might buy more than 10% of this good. So you really buy a lot more of this thing when you get richer. So up next, you can take a look at a few different videos. You can think about taking a review of the elasticity of demand or the elasticity of supply. You can also take a look at cross-price elasticity, so how the prices of one good might affect the quantity demanded of a different good. Or you could think about the sizes of the elasticity scores and think about what that means by taking a look at the video on categories of elasticity. Or if you want to get deeper into the math, you can take a look at methods of calculating elasticity.