income elasticity of demand managerial economics
DESCRIPTION
TRANSCRIPT
INCOME ELASTICITY OF DEMAND
The income elasticity of demand is defined as the rate of change in the quantity demanded of a good due to changes in the income of the consumer.
It is the responsiveness of demand to the change in income
It is calculated as the percentage change in demand to the percentage change in income
INCOME ELASTICITY OF DEMAND
It measures the relationship between a change in quantity demanded and a change in income.
The basic formula for calculating the of income elasticity is:
Percentage change in demand Percentage change in income
If, in response to a 10% increase in income, the demand for a good increased by 20%, the income elasticity of demand would be 20%/10% = 2.
When a buyer in a certain income range experiences an income increase, their purchase of a product changes to match that of individuals in their new income range.
EXAMPLE
1) If the proportion of income spent on the goods remains the same as the income increases ,then the income elasticity of demand for the goods is equal to one.
2) If the proportion of income spent on goods increases as income increases , then the income elasticity of demand is more than one.
Relationship between income elasticity for goods and the proportion of income spent on it
3) If the proportion of income spent on goods decreases as income increases , then the income elasticity for the goods is less than one.
4)If the change in income will have no effect on the quantity demanded , then it is negative income elasticity.
NORMAL GOODS Normal goods have a positive income
elasticity of demand so as income rise more is demand at each price level.
Normal goods are of two:-Normal Necessities and Normal Luxuries (both have a positive coefficient of income elasticity).
Necessities have an income elasticity of demand of between 0 and +1. Demand rises with income. If the income elasticity is less than one, it is called a necessity.
Luxuries on the other hand are said to have an income elasticity of demand more than +1. (Demand rises more than proportionate to a change in income).
If the income elasticity of good is greater than one, it is called luxury.
INFERIOR GOODS Inferior goods have a negative income
elasticity .Demand falls as income rises.
Examples of Normal and Inferior goods.
Negative income elasticity : If the demand for a commodity
decreases with an increases in income, the demand is said to be negative income elastic. The income elasticity co-efficient in this case is Ed<0
Eg: Jowar, Bajra etc
TYPES OF INCOME ELASTICITY
Zero income elasticity When the change in income do not
bring about any changes in quantity demanded, that is quantity demanded remains same, it is said to be zero income elasticity. Income elasticity co-efficient is
Ed = 0Eg : Salt, Matches
Income elasticity less than one When the percentage change in
quantity demanded is less than percentage changes in income , the income elasticity is said to be less than one. Thus income elasticity co-efficient is Ed <1
Eg : Food grains
Income elasticity equal to one If the percentage change in quantity
demanded is equal to percentage change in income, it said to be unitary income elastic. Income elasticity co-efficient is Ed =1
Eg : Fruits , Vegetables.
Income elasticity greater than one The percentage change in quantity
demanded is greater than the percentage change in income, the income elasticity is said to be greater than one. The income elasticity co-efficient is Ed > 1
Eg : TV sets, Cars.
Quantity of a commodity demanded
ab c
d
e
X
Y
INCOME
a : Ed <0b : Ed =0c : Ed < 1d : Ed = 1e : Ed > 1
NATURE OF GOODS TYPES OF ELASTICITY
EXAMPLES
NORMAL GOODS POSITIVE FRUITS
INFERIOR NEGATIVE JOWAR
LUXURY POSITVE, GREATER THAN 1
TV SETS
ESSENTIAL POSITIVE,LESS THAN 1
FOOD GRAINS
NEUTRAL ZERO SALT