Income Elasticity of Demand

March 29, 2018 General Studies

Price elasticity of demand measures the degree of responsiveness of quantity demanded of a good X to a given change to a price of itself, ceteris paribus. Price elasticity of demand is calculated by dividing the proportionate change in quantity demanded by the proportionate change in price. When PED is greater than one (PED > 1) demand is said to be elastic When PED is between zero to one (0 > PED > 1) demand in said to be inelastic When PED is equal to one (PED > 1) demand is said to be unit-elastic (unitary elasticity) A perfectly inelastic demand curve, perpendicular to the X-axis, has zero elasticity.

A perfectly elastic demand curve, horizontal to X axis, is infinitely elastic. The price elasticity of demand for a particular demand curve is influenced by the following factors: Availability of substitutes: the greater the number of substitute products, the greater the elasticity. Degree of necessity or luxury: luxury products tend to have greater elasticity than necessities. Some products that initially have a low degree of necessity are habit forming and can become “necessities” to some consumers.

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Proportion of income required by the item: products requiring a larger portion of the consumer’s income tend to have greater elasticity. • Time period considered: elasticity tends to be greater over the long run because consumers have more time to adjust their behavoir to price changes. Income elasticity of demand measure the degree of responsiveness of quantity demanded of good X to a given change in level of income, ceteris paribus.

Income elasticity of demand is calculated by dividing the proportionate change in quantity demanded by the proportionate change in level of income. When YED is less than one (YED ; 1) demand is income inelastic. When YED is greater than one (YED ; 1) demand is income elastic. If YED is negative (YED ; 0) the good is sometimes referred to as an inferior good as opposed to normal goods ( 0 ; YED ; 1) and superior ( luxury ) goods (YED;1).

The income elasticity of demand for a particular demand curve is influenced by the following factors: • Need of good ( Basic necessity or luxury good ) • Level of income • Time factor One reason for this is that as a society becomes richer, there are changes in consumer perceptions about different goods and services together with changes in consumer tastes and preferences. What might have been considered a luxury good several years ago might now be regarded as a necessity

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