Income elasticity of Demand Managerial Economics

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Income elasticity of Demand Managerial Economics

  1. 1.    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
  2. 2.   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
  3. 3.   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.
  4. 4. 1) 2) 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. If the proportion of income spent on goods increases as income increases , then the income elasticity of demand is more than one.
  5. 5. 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.
  6. 6. 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.
  7. 7. 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. 
  8. 8.  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
  9. 9.  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 = 0 Eg : Salt, Matches
  10. 10.  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 coefficient is Ed <1 Eg : Food grains
  11. 11.  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.
  12. 12.  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.
  13. 13. Y I N C O M E a b c a : Ed <0 b : Ed =0 c : Ed < 1 d : Ed = 1 e : Ed > 1 d e Quantity of a commodity demanded X
  14. 14. 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

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