10 income elasticity income

Income elasticity of demand

Responsiveness of demand to a change in income

Calculating income elasticity of demand

Income elasticity of demand = percentage change in quantity demanded

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Percentage change in income

Interpreting the value of income elasticity of demand

• necessities

  • ‘Basic goods’ that consumers need to buy

  • Income inelastic

  • Between +1 and -1

• Luxury goods

  • Goods that consumers like to buy if they can afford them

  • Income elastic

  • 1 < x < -1

• Normal goods

  • An increase in income results in an increase in the quantity demanded

  • Value of income elasticity will be positive

• Inferior good

  • An increase in income results in a decrease in the quantity demanded

  • Value of income elasticity will be negative

  • Quantity demanded and undone have an inverse relationship

Price elasticity and business

Fiend can know the value of price elasticity for their practice and can predict the effect on total revenue if any price change they make.

Income elasticity and businesses

If firms know the income elasticity of demand for their product, they can respond to predicted changes in incomes.

Price elasticity and the government

• indirect taxes

  • Government often raise revenue by imposing indirect taxes on products

  • Government select product that have inelastic demand for example, necessities or have few substitutes.

  • But they don’t target essential goods for human survival such as food and water.

  • Government also impose taxes on cigarettes, alcohol and petrol

• Subsidies

  • Subsidy is design to help the poor by making the good cheaper.

  • Important that demand is price inelastic because if it is not, increase in supply will only reduce the price slightly