the market: income elasticity of demand

income elasticity of demand

a measure of responsiveness of demand to a change of income

income elastic

the percentage change in demand for a product is proportionately greater than the percentage change in income

income inelastic

percentage change in demand is proportionately less than the percentage change in income

discretionary expenditure

non essential spending or spending that is not automatic

inferior goods

goods that will experience a fall in demand if income rises/falls

normal goods

items that will experience a rise in demand in income rises/falls

income elasticity of demand formula

Q/I

uses of YED

used to deterine weather a good is inferior or normal

how to interpret YED

x> 1 income elastic because change in demand is greater than the change in income

x<1 income inelastic because change in demand is less

factors affecting YED

• weather its a luxury or a necessity

• the price of a product relative to incomes

features of a luxury item how does it affect the YED

• a consumer will want them but not need them

• income elastic

• usually a disctretionary good

features of a necessity

• basic good

• income inelastic

• consumers cannot live without them

how does the price of a product relative to incomes affect the YED

influences the income elasticity

• this is because the demand for cheap products is usually inelastic and vice cersa

reasons why income elasticity of demand is important

• production planning

• product switching

• aids with selling goods with high income elasticity

• aids businesses selling goods with low income elasticity

how can income elasticity of demand be used to sell goods with high-income elasticity

• because demand is sensitive to a change in income

during economic growth: demand for luxury goods increases

during a recession: demand for luxuring goods decresses

how can income elasticity be used to sell goods with low-income elasticity

demand is income inelastic

in countries of economic growth: demand for inferioir and normal goods tends to decline

what is the ideal income elsaticity

higher income elasticity closer to 1

how can income elasticity be used for production planning

• allows a business to predict changes in incomes as demand changes

• therefore supply is adjusted to meet demand

• aids in adjusting the price as well

how can income elasticity be used for product switching

having flexibles resources where switching production from one product to another is easy

used when a product is income elastic