Economics Basics Income elasticity on demand
Introduction
What Is Economics
Scarcity
Macro and Microeconomics
Production Possibility Frontier (PPF)
Opportunity Cost
Specialization and Comparative Advantage
Absolute Advantage
Demand and Supply
The Law of Demand
The Law of Supply
Time and Supply
Supply and Demand Relationship
Equilibrium
Disequilibrium
F. Shifts vs. Movement
Elasticity
The availability of substitutes
Income available to spend on the good
Time
Income Elasticity of Demand

Utility
Monopolies
Oligopolies
Perfect Competition
Conclusion

 

 

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In the second factor outlined above, we saw that if price increases while income stays the same, demand will decrease. It follows, then, that if there is an increase

in income, demand tends to increase as well. The degree to which an increase in income will cause an increase in demand is called income elasticity of demand, which can be expressed in the following equation:

 

If EDy is greater than one, demand for the item is considered to have a

high income elasticity. If however EDy is less than one, demand is considered to

be income inelastic. Luxury items usually have higher income elasticity because when people have a higher income, they don't have to forfeit as much to buy

these luxury items. Let's look at an example of a luxury good: air travel.

 

Bob has just received a $10,000 increase in his salary, giving him a total of

$80,000 per annum. With this higher purchasing power, he decides that he can now afford air travel twice a year instead of his previous once a year. With the following equation we can calculate income demand elasticity:

 

 Income elasticity of demand for Bobís air travel is seven - highly elastic.

 

With some goods and services, we may actually notice a decrease in demand as income increases. These are considered goods and services of inferior quality

that will be dropped by a consumer who receives a salary increase. An example may be the increase in the demand of DVDs as opposed to video cassettes,

which are generally considered to be of lower quality. Products for which the demand decreases as income increases have an income elasticity of less than zero. Products that witness no change in demand despite a change in income usually have an income elasticity of zero - these goods and services are considered necessities.

 

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