Income Elasticity Of Demand

Income elasticity of demand is the degree of responsiveness of quantity  demanded of a commodity to a little change in consumer’s income. That is, it measures how changes in income of consumers will affect the quantity of commodities demanded by such consumers.   Mathematically, income elasticity of demand is expressed as:   % change in […]

Income elasticity of demand is the degree of responsiveness of quantity  demanded of a commodity to a little change in consumer’s income. That is, it measures how changes in income of consumers will affect the quantity of commodities demanded by such consumers.

 

Mathematically, income elasticity of demand is expressed as:

 

% change in Quantity Demanded

 

% change in Income

 

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When the percentage change in income brings about an equal change in the quantity demanded, then income elasticity is unit.

 

When the percentage change in income is greater than the percentage change in quantity demanded, income elasticity is less than unit, hence income is inelastic.

 

 

When the percentage change in quantity demanded is greater than the percentage change in income, then income elasticity is greater than unit, hence income elasticity is elastic.

 

Types Of Income Elasticity Of Demand

Positive Income Elasticity of Demand: is the type of income elasticity of demand in which an increase in income of consumer will equally lead to an increase in the quantity of commodity demanded. This is applicable majorly to normal goods.

Negative Income Elasticity of Demand: is the type in which an increase in income of consumers will lead to a decrease in the quantity of commodity demanded. This is applicable to inferior goods.

 

Illustration: The table below shows the various income and demand for different commodities.

Income                                   Quantity Demanded

#                                                             Kg

20,000                                                   120

36,000                                                   96

40,000                                                   160

44,000                                                   200

45,000                                                     240

47,000                                                     252

  1. a) Calculate the income elasticity between (i) A and B (ii) C and D (iii) E and F
  2. b) What kind of good relationship is between (i) A and B (ii) C and D

 

SOLUTION

 

Income Elasticity of Demand      =        % Change in Quantity Demanded

 

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% Change in Income

 

(a)        Income Elasticity of Demand

 

i           Between A and B

 

= 120– 96 x 100

 

120                                       = 0.25

 

36000 – 20,000 x 1000

 

20,000

 

ii           Between C and D

 

200 – 160 x 100

 

160                                            = 2.5

 

44000 – 40,000 x 100

 

40,000

 

iii          Between E and F

 

252   –    240    x 100

 

240

 

= 1.125

 

47000 –  45000 x 100

 

45000

 

(b)   i.    Giffen goods or inferior good

 

Normal goods

It should be re-emphasized that positive income elasticity of demand is for ‘normal’ or ‘superior’ or ‘luxury goods’, whereas Negative income elasticity of demand is for ‘abnormal’, or ‘inferior goods.

Related Posts:

Elasticity Of Supply

Elasticity Of Demand | Meaning, Types, Price, Price Elasticity Of Demand

Change In Quantity Demanded

Theory Of Consumer Behaviour

Cross Elasticity Of Demand

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