![]() ![]() ![]() Possible examples of Giffen good – rice, potatoes, bread.For example, if the price of wheat rises, a poor peasant may not be able to afford meat anymore, so has to buy more wheat. The reason is that the income effect of a rise in the price causes you to buy more of this cheap good because you can’t afford more expensive goods. A rare type of good, where an increase in price causes an increase in demand. subscription to netflix or take-away food. Comfort good – a good which isn’t a necessity, but gives enjoyment/utility, e.g.Though this becomes a subjective term, is electricity a necessity? Is broadband internet a necessity? Necessity good – something needed for basic human existence, e.g.Inferior good – Supermarket own brand coffee, bus travel, a day out at theme park.Normal good – ordinary broadband, ordinary tv license, Ford Focus car, holiday to somewhere close to where you live.Luxury good – Superfast broadband, organic luxury coffee, Netflix tv, Porsche, a foreign holiday to Bali.Sometimes, either to be extremely clear or because a wide variety of elasticities is being discussed, the elasticity of demand or the demand elasticity will be called the price elasticity of demand or the “elasticity of demand with respect to price.” Similarly, elasticity of supply or the supply elasticity is sometimes called, to avoid any possibility of confusion, the price elasticity of supply or “the elasticity of supply with respect to price.” But in whatever context elasticity is invoked, the idea always refers to percentage change in one variable, almost always a price or money variable, and how it causes a percentage change in another variable, typically a quantity variable of some kind. When you hear the phrases “elasticity of demand” or “elasticity of supply,” they refer to the elasticity with respect to price. The question can be framed in terms of the elasticity of tax collections with respect to spending on tax enforcement that is, what is the percentage change in tax collections derived from a percentage change in spending on tax enforcement? With all of the elasticity concepts that have just been described, some of which are listed in Table 1, the possibility of confusion arises. For example, imagine that you are studying whether the Internal Revenue Service should spend more money on auditing tax returns. The elasticity concept does not even need to relate to a typical supply or demand curve at all. The evidence on the supply curve of financial capital is controversial but, at least in the short run, the elasticity of savings with respect to the interest rate appears fairly inelastic. However, if the supply curve for financial capital is highly inelastic, then a percentage increase in the return to savings will cause only a small increase in the quantity of savings. Such a policy will increase the quantity if the supply curve for financial capital is elastic, because then a given percentage increase in the return to savings will cause a higher percentage increase in the quantity of savings. Sometimes laws are proposed that seek to increase the quantity of savings by offering tax breaks so that the return on savings is higher. The income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income, as follows: Elasticity can, in principle, be measured for any determinant of supply and demand, not just the price. ![]() Similarly, quantity supplied (Qs) depends on the cost of production, changes in weather (and natural conditions), new technologies, and government policies. Recall that quantity demanded (Qd) depends on income, tastes and preferences, population, expectations about future prices, and the prices of related goods. The basic idea of elasticity-how a percentage change in one variable causes a percentage change in another variable-does not just apply to the responsiveness of supply and demand to changes in the price of a product. S’more ingredients: negative or positive cross-price elasticities of demand? ![]()
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