205 Demand Curves & Income in Kind

The concept of the demand curve is one which is easy to understand. However, we go deeper into issues such as elasticity, demand curves for different types of economics goods and even deriving it.

We shall understand the concept of elasticity using a few examples. If you were a sports drink fanatic, no matter how much the price of sports drinks increases, you are still likely to consume almost the same amount of sports drink in a month! You might buy lesser bottles but you will still consume them.

Assuming you were an alcoholic instead, you don’t drink much sports drink and now the price of sports drink increased. I think you’ll probably not buy anymore sports drink. That is the concept of elasticity. How sensitive are you when the price of a particular good increases or decreases?

Income in kind simply refers to a whole where there is no money. People earn their incomes in terms of goods and they are able to trade them for other goods.

At the end of this video, you should be able to:

  • Derive the demand curve from the budget constraint and indifference curve
  • Draw demand curves for goods with different price elasticities of demand.
  • Prove whether the demand for good x is inelastic or elastic
  • Know when to use income in kind for economic analysis and answering exam questions.

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13 Comments

  1. Tommy says:

    Hey man, for your 2nd video, the question stated that normal good is inelastic right? Since the demand of elasticity is less than 1.
    Then how is your explaination proofing that?

  2. Tommy says:

    Sorry i meant the question is asking if the price elasticity of demand is less than unity, which is inelastic right? But in your 2nd video, you’re proofing the elasticity is elastic, am i right?

    • Quickienomics says:

      Hi Tommy,

      Basically, the method can be used to prove either elastic or inelastic demand. It all depends on how you formula the string of equations that end up showing your elasticity more than or less than one. And yes, in the 2nd video, i’m proving elastic demand. 🙂

  3. Tommy says:

    Oh I see what you’re doing there. Thanks! Appreciate your help. 🙂

  4. Romona says:

    Hey there, for the analysis of income in kind in the first video, where would a Giffen good be? Also in this case, are these goods gross substitutes or complements?

    Thanks!
    Romona

    • Quickienomics says:

      Hi Romona,

      A giffen good would be one that the income effect is greater than the substitution effect. As for analyzing whether the pair are substitutes or complements, simply draw a horizontal line across the initial point where the IC meets the budget line then compare that bundle with another bundle on the new budget line above and below this horizontal line.

      Hope that helps! 🙂

  5. Marek says:

    Hi,

    I am a little bit confused about the elasticity formula as it is shown in your second video.

    You define a(alpha)=dP.X – but this X is X0 – the original quantity demanded.
    You then define y(yankee/gamma)=dX.P – but this P is P1 – not the original, but the new price.

    Now from the diagram it is clear why this is, but then you rearrange it to give the general elasticity equation, dX.P/dP.X

    This equation, should really read dX.P1/dP.X0 – am I right? Is this the elasticity equation I should memorise?

    • Quickienomics says:

      Hi Marek!

      Yes, that is the equation that you should memorize. Also take note that if a demand function is given, you could differentiate the quantity demand w.r.t to price and multiply that with the current price over quantity demand to get the price elasticity of demand.

  6. tabata says:

    I like your fantastic web site, I was searching for this all over.
    best regards

  7. Budgie says:

    Hi Sir, I noticed in some books the elasticity formula has only dx/dp and does not have p/x beside it…which one is the correct formula? And why are they written differently..? Thank you..

  8. Evangeline says:

    Hi, I don’t understand the part where you say alpha is loss in revenue, yankee is gain in revenue. How do you derive that? Thanks.