question archive Imagine the income elasticity of demand for housing property in 2008-09 was exactly 1
Imagine the income elasticity of demand for housing property in 2008-09 was exactly 1
Subject:EconomicsPrice:2.88 Bought12
Imagine the income elasticity of demand for housing property in 2008-09 was exactly 1.40. Due to the Great Recession, we observed incomes dropping by 5% in 2009. How did consumers adjust their purchases (quantity demanded) for housing property?
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Answer: Housing quantity demanded dropped 7%
As stated above the income elasticity of demand tells us how much quantity demanded changes for a 1% change in income. In this case where the elasticity is 1.4, every 1% change in income results in a 1.4% change in housing quantity demanded. This means a 5% drop in income results in a 5*1.4=7% drop in housing quantity demanded.
