INCOME ELASTICTY OF DEMAND

by • 19/06/2011 • B.COM PART 1 EconomicsComments (0)597

 

If other things remain constant, elasticity of demand regarding income is the degree of change in the quantity demanded of a product in response to change in income.

Formula:

Percentage change in Qty Demand

Ed = ______________________________

Percentage change in Price

∆Q        Y

Ed = ____ x _____

∆Y         Q

Income elasticity of demand may effect in two ways.

  • Normal Goods:

In the case of normal goods, when income increases  the quantity demanded also increases. Hence, it will result in positive elasticity of demand.

  • Inferior Goods:

In the case of inferior goods, when income increases quantity demanded falls because people will now have the purchasing power to buy better goods. Hence, it will result in negative income elasticity of demand.

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