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Income Elasticity of Demand

Income Elasticity of Demand | What are the types of income elasticity of demand?

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Income Elasticity of Demand | Microeconomics | Quiz Questions | MCQs |Management Notes

The degree of responsiveness of quantity demanded for a good to the change in the income of the consumer is shown by the income elasticity of demand. Simply, we can say that it is the change in demand for the quantity as a result of the change in income. In other words, income elasticity measures how a good’s quantity demanded responds to a change in income.

Income elasticity of demand formula

Ey = (ΔQ/ΔY)*(Y/Q)

where, 

  • ΔQ= Change in Quantity demanded, Q = Initial Quantity demanded
  • ΔY= Change in Income , Y = Initial Income 
  • Ey = Income Elasticity 

[Related to Normal and Inferior Goods]

 

Types of Income Elasticity of demand 

There are three types of Income elasticity which are explained below:

  1. Positive Income Elasticity  [Ey>0]: If the demand for a commodity increases with the increase in income then it is called positive income elasticity. For example, Normal Goods.
  2. Negative Income Elasticity [Ey<0]: If the demand for a commodity decreases with the increase in income then it is called negative income elasticity. For example, Inferior Goods.
  3. Zero Income Elasticity [Ey=0]: If the demand for a commodity does not change with the increase in income then it is called zero income elasticity. For example, Neutral Goods(Salt, medicine)

 

How to calculate income elasticity of demand

Income elasticity  can be calculated by using Arc and Point methods:

  1. Arc Method: In the arc method, the calculation is done from the coefficient of an average between two points of the income demand curve.
  2. Point Method: In the point method, the calculation is done by analyzing the upward sloping income demand curve. 

 

Uses income elasticity of demand in Business

  • It is very useful to understand the various stages of the trade cycle(Prosperity, Depression).
  • It is useful for forecasting demand as it helps in the estimation of the production level requirement for various commodities at a certain point in time in the future.
  • It is useful for the classification of normal and inferior goods as well as useful for making the marketing strategy.

 

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Importance of demand analysis in business decision making

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