I n t h I s c h a p t e r y o u w I l L

income
elasticity of demand
to measure how the quantity demanded changes as con-
sumer income changes. The income elasticity is the percentage change in quan-
tity demanded divided by the percentage change in income. That is,
Even though the slope of a linear demand curve is constant, the elasticity is
not. The reason is that the slope is the ratio of 
changes
in the two variables, whereas
the elasticity is the ratio of 
percentage changes
in the two variables. You can see this
most easily by looking at Table 5-1. This table shows the demand schedule for the
linear demand curve in Figure 5-5 and calculates the price elasticity of demand
using the midpoint method discussed earlier. At points with a low price and high
quantity, the demand curve is inelastic. At points with a high price and low quan-
tity, the demand curve is elastic.
Table 5-1 also presents total revenue at each point on the demand curve. These
numbers illustrate the relationship between total revenue and elasticity. When the
price is $1, for instance, demand is inelastic, and a price increase to $2 raises total
revenue. When the price is $5, demand is elastic, and a price increase to $6 reduces
total revenue. Between $3 and $4, demand is exactly unit elastic, and total revenue
is the same at these two prices.
I
F THE PRICE OF ADMISSION WERE HIGHER
,
HOW MUCH SHORTER WOULD THIS LINE
BECOME
?
i n c o m e e l a s t i c i t y o f
d e m a n d
a measure of how much the quantity
demanded of a good responds to a
change in consumers’ income,
computed as the percentage change
in quantity demanded divided by the
percentage change in income

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C H A P T E R 5
E L A S T I C I T Y A N D I T S A P P L I C AT I O N
1 0 3
Income elasticity of demand 
.
As we discussed in Chapter 4, most goods are 
normal goods:
Higher income raises
quantity demanded. Because quantity demanded and income move in the same
direction, normal goods have positive income elasticities. A few goods, such as bus
Percentage change in quantity demanded
Percentage change in income
H
OW SHOULD A FIRM THAT OPERATES A
private toll road set a price for its ser-
vice? As the following article makes
clear, answering this question requires
an understanding of the demand curve
and its elasticity.