Ask Anything #21 min read

Anonymous asked,

When income increases, do both demand and ped of a good change?

I made a video response to the question. The answer may surprise you.

[youtube=http://youtu.be/IcXzwoetz3Y]

Errata: For the diagram at the end, the demand for necessity should shift less than the demand for luxury goods. They should not intersect at the same quantity given the original price.

Hope that was useful.

Till next time, dream economics.

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5 Comments

  1. It seems that you made a small mistake when calculating the PED ,the original price should be 5, but you used 4. It should be around 12:44 in your video and the mistake continues for the subsequent calculation.

    Reply

    1. Thank you for your comment! You are right. The denominator should be 5 instead of 4.

      So the correct values of PED should be -1.2 and -5/8 respectively. The main idea still holds though. Demand becomes more price inelastic.

      Reply

  2. Hello! Regarding the video u have made to ans the qn, I have different views at the part abt changing PED when DD shifts rightward (near the beginning).

    What I feel is that, when demand shifts rightward, price naturally will rise, given constant supply. So, if u go on to calculate the PED of the two new points, they dont seem to contradict because while the numerator becomes smaller the denominator becomes smaller too. I think that it is more suitable to see the situation with presence of supply since any legit price is only made possible by both supply and demand.

    So, the implication of the divergence in thinking, I would think that the new curve for necessity be drawn more steeper than before.

    Please enlighten me with econoception if I have any misconception! 🙂

    Reply

    1. Hi zc,

      Thank you for your comment. Personally I don’t think it’s necessary to include supply in the picture. By definition, an increase in demand means quantity demanded at each price level increases. Thus, we can compare PED values of two demand curves by looking at its value along a price line.

      Reply

  3. By the way, keep the questions coming in! I’ll consolidate them and answer all in a weekend video. Do include whatever current thoughts you have about the questions as well, so I can address them more specifically.

    In future videos I will also cover problem solving and thinking skills that will allow you to answer these questions on your own.

    Thanks.

    Reply

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