Micro Foundations · intermediate
What moves on the Price Elasticity of Demand & Supply diagram
Higher realrealAdjusted for inflation, measured in actual purchasing power. incomes raise demand at every price for a normal good, shifting the demand curve right by proportionally more when the good is a luxury.
Income elasticityelasticityHow strongly one variable responds to another, usually quantity's percentage response to a price change. asks how demand responds to income, not to price.
A sustained wage boom leaves households with much more discretionary spending.
Demand shifts right, and for a luxury good it shifts by proportionally more than income rose.
That is a income elasticityelasticityHow strongly one variable responds to another, usually quantity's percentage response to a price change. above one: the defining test for a luxury rather than a necessity.
Examiners ask this as: income elasticity, luxury good, normal good, incomes rise, demand increases.
Other scenarios on Price Elasticity of Demand & Supply