The income elasticity of a quantity q with respect to an income y is the percentage change in q caused by a one percent change in y. Formally, this is
e = dq/dy · (y/q).
An intuitive version of this formula replaces the derivative with changes
e = ∆q/∆y · (y/q).
Reorganizing this yields
e = (∆q/q) / (∆y/y).
A common functional form is
log(q) = a + b · log(y).
or q = exp(a+b·log(y)). Differentiating using the chain rule yields
dq/dy = (b/y)·exp(a+b·log(y)) = (b/y)·q = b·(q/y).
The elasticity of q with respect to y is then b, which is constant.
Classic Economic Models
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Balance of Payments
Endogenous Technical Change
Federal Funds (Fed Funds) Rate
Fixed Exchange Rate
Floating Exchange Rate
Gross Domestic Product (GDP)
Production Possibility Frontier
Reservation Wage Rate
Theory of the Consumer
Theory of the Firm
Velocity of Money