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Income elasticity of demand

It is the degree of responsiveness of the quantity demanded of a good to a small change in the income of the consumers.
 
Symbolically, it can be represented as:
 
Description: 18696.png 
 
Description: 18713.png 

Elasticity greater than one (Ei > 1):

If income levels increases, and the demand for goods increase by more than proportionate extent, such goods will be luxury goods. The income elasticity is greater than unity. v

Elasticity equal to one (Ei = 1):

If the proportion of income spent on goods remains the same as income increases, then the income elasticity is equal to one.

Elasticity lesser than one (>0 Ei < 1):

If income levels increases, and the demand for goods increase by less than proportionate extent, such goods will be necessary goods. The income elasticity is lesser than unity.

Elasticity lesser than zero (Ei < 0):

If demand decreases with an increase in money income of consumers, such goods are called inferior goods. The income elasticity is lesser than zero.
 
In other words,
  • In case of inferior goods, income elasticity is < 0
  • In case of necessary goods, income elasticity is > 0 but < 1
  • In case of luxury goods, income elasticity is > 1
Example

If the income of a household increases by 10%, the demand for TV rises by 20%. Thus the income elasticity of demand is:

 

Income elasticity (Ei) = Percentage change in quantity demanded / Percentage change in income

 

= 20% รท 10% = 2. Thus, the price elasticity is greater than 1. It is a luxurious commodity.

 




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