Income elasticity of demand (ei)
Income elasticity is the ratio of a percentage change in the quantity demanded to a percentage in income, other factors remaining constant. The point income elasticity of demand is
Ei = (ΔQ/Q) / (ΔI/I)
Where Δ Q and ill refer to change in quantity and change in income respectively. Note that Ei measures the shift in the demand curve at each price level.
To determine the arc income elasticity of demand we use the average of the original and new incomes and quantities.
Ei = (ΔQ/ΔI)* [(I2+I1)/2]/[Q2+Q1]/2
where the subscripts 1 and 2 refer to the original and the new levels of income and quantity respectively, or vice versa.
Income Elasticity can be Positive or Negative
It is positive (Ei > 0) for normal or superior goods. An increase in income leads-to an increase in consumption. Inferior goods have negative (Ei < 0) income elasticity. Different types of goods have varying positive income elasticities.
(a) Necessities have low income elasticity (Ei < 1). A change in sales of goods, like wheat and sugar, is likely to be less, to a proportionate change in income.
(b) Luxuries have more than proportionate change in sales with a change in income (Ei >1). Demand for cars and TV increases more than proportionately with an increase in income. It means that their demand is highly cyclical or sensitive to Income.
Uses of Income Elasticity
1. Income elasticity for a firm is useful in estimation and prediction of demand in the long run. Firms making products with high income elasticities are likely to grow rapidly as incomes rise in an expanding economy and products with low income elasticities are likely to experience modest expansion. Suppose the elasticity for automobiles is 3, it means that a 1% increase in disposable income will lead to a 3% increase in quantity demanded.
2. Income elasticity is also useful in identifying the market for the product on the basis of the type of product the consumers are likely to purchase more with an increase in income.
3. Income elasticity is helpful in forecasting change in demand for the good-a firm sells in different economic conditions. The demand for a good with low income elasticity will not fluctuate much with a recession or boom. But the demand- for luxuries will rise with boom and fall sharply during recession.
Managerial Economics Tutoring - Assignment Help
Our online managerial economics experts are here for your help. Expertsmind.com online assignment help-homework help brings you high grade in your courses and examination, We at Expertsmind.com offers managerial economics assignment help, managerial economics homework help and projects help. We offer complete package of managerial economics online tutoring for 24x7 hours.
ExpertsMind.com - Income Elasticity of Demand Assignment Help, Income Elasticity of Demand Homework Help, Income Elasticity of Demand Assignment Tutors, Income Elasticity of Demand Solutions, Income Elasticity of Demand Answers, Demand Elasticity Assignment Tutors, Uses of Income Elasticity