Income elasticity of demand
Income elasticity of demand is the responsiveness of demand to changes in income. It is the proportionate change in quantity demanded to the proportionate change in income. Income elasticity of demand expresses the responsiveness of a consumer's demand for any commodity to the change in income, other determinants of demand remaining constant.
To calculate the income elasticity of demand, the following general
formula can be used:
Proportionate change in quantity demanded AQ AY AQ Y '
Proportionate change in income Q Y AY Q
An income elasticity of demand greater than 1 means a bigger
proportionate increase in quantity demand. It follows that producers of such goods may need to plan extra capacity in times of rising incomes.
An increase in income can lead to either an increase in demand or a
decrease in demand or no change in quantity demanded. Similarly, a fall in income can lead to a decrease or an increase in demand or no change in demand. If quantity demanded changes in the same direction as income, the commodity has a positive income elasticity of demand.
For most goods, income elasticity of demand will be positive. However, there are exceptions to this rule. For some goods, a rise in income leads to a decrease in demand. If quantity demanded for a commodity moves in the opposite direction with income, the commodities have a negative income elasticity of demand. Such goods are referred to as inferior goods. Cassava is the most often quoted example of an inferior good. As one's income increases, one consumes less cassava and vice versa. The zero income elasticity of demand is when quantity demanded is not responsive to income changes. As income changes, quantity demanded remains constant.
The concept of income elasticity of demand can help us to distinguish
between essential and non-essential commodities. Generally, essentials have a low income elasticity of demand and non-essentials have a high income elasticity of demand.
Income £d
The concept of income elasticity of demand also helps the producers to estimate the future demand for the product as income changes. It helps the producers in their decisions about the future quantity of the
commodity to be supplied. If the commodity is having a high income
elasticity of demand and the incomes are increasing, then the producer should increase the supply. If the commodity is having a high income elasticity of demand and incomes are decreasing, then the producer should reduce the supply of the commodity. However, if the commodity is having a low income elasticity of demand and incomes are increasing, the producer should slightly increase the supply of the commodity. If the income is reducing, the quantity supplied should slightly be reduced. A good example of a commodity with a low income elasticity of demand is salt. Whether incomes are increasing or reducing, the individual would consume more or less the same amount of salt and therefore, there is no need for the producer to change the investment amount.
To calculate the income elasticity of demand, the following general
formula can be used:
Proportionate change in quantity demanded AQ AY AQ Y '
Proportionate change in income Q Y AY Q
An income elasticity of demand greater than 1 means a bigger
proportionate increase in quantity demand. It follows that producers of such goods may need to plan extra capacity in times of rising incomes.
An increase in income can lead to either an increase in demand or a
decrease in demand or no change in quantity demanded. Similarly, a fall in income can lead to a decrease or an increase in demand or no change in demand. If quantity demanded changes in the same direction as income, the commodity has a positive income elasticity of demand.
For most goods, income elasticity of demand will be positive. However, there are exceptions to this rule. For some goods, a rise in income leads to a decrease in demand. If quantity demanded for a commodity moves in the opposite direction with income, the commodities have a negative income elasticity of demand. Such goods are referred to as inferior goods. Cassava is the most often quoted example of an inferior good. As one's income increases, one consumes less cassava and vice versa. The zero income elasticity of demand is when quantity demanded is not responsive to income changes. As income changes, quantity demanded remains constant.
The concept of income elasticity of demand can help us to distinguish
between essential and non-essential commodities. Generally, essentials have a low income elasticity of demand and non-essentials have a high income elasticity of demand.
Income £d
The concept of income elasticity of demand also helps the producers to estimate the future demand for the product as income changes. It helps the producers in their decisions about the future quantity of the
commodity to be supplied. If the commodity is having a high income
elasticity of demand and the incomes are increasing, then the producer should increase the supply. If the commodity is having a high income elasticity of demand and incomes are decreasing, then the producer should reduce the supply of the commodity. However, if the commodity is having a low income elasticity of demand and incomes are increasing, the producer should slightly increase the supply of the commodity. If the income is reducing, the quantity supplied should slightly be reduced. A good example of a commodity with a low income elasticity of demand is salt. Whether incomes are increasing or reducing, the individual would consume more or less the same amount of salt and therefore, there is no need for the producer to change the investment amount.