• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Income Elasticity of demand

Extracts from this document...

Introduction

Income Elasticity of demand The income elasticity measures the response rate of the amount due to an increase (or decrease) in income of consumers. The formula for the income elasticity (IEoD), is: IEoD = (% change in the quantity required) / (% change on income) To calculate the income elasticity For example: Given the following data, calculate the income elasticity of demand changes in the consumer income 40000 $ $ 50000th The first thing we do find the data that we need. We know that income is $ 40000 and the new price is $ 50000 that we income (OLD) = $ 40000 and Income (NEW) = $ 50000. De la carte, we see that the amount requested if the income is $ 40000 and 150, if the price is $ 50000 is the 180th As we of $ 40000 to $ 50000, we have QDemand (OLD) ...read more.

Middle

= 0.2 Thus, we find that the amendment% of the amount requested = 0.2 (We leave them in decimal. In percentage terms, it would be 20%) and we have the number at the latest. Now we have to calculate the percentage change in prices. Calculating the percentage change on income Analogues, the formula for calculating the percentage change of income is as follows: [Result (NEW) - Income (OLD)] / income (former) By filling in the values that we have written, then: [50000 - 40000] / 40000 = (10000/40000) = 0.25 We have both the percentage change in the quantity and demand change, as a percentage of revenue, so that we can calculate the income elasticity. ...read more.

Conclusion

A very high income elasticity suggests that the incomes of consumers rises, consumers buy much of this product. A very low price elasticity means exactly the opposite, that the changes in the income of consumers has little impact on demand. Often, an assignment or test asks follow-up question, "Is the quality of a luxury good, a normal good or less good income between the range of $ 40000 and 50000 dollars?" To use the following rule of thumb: Effect Income elasticity coefficient Classification of good a proportionately larger change in the quantity demanded >1 Luxury good a proportionately smaller change in the quantity demanded <1 Necessity a negative change in the quantity demanded <0 Inferior good In our case, we have calculated the income elasticity of 0.8 our product is inelastic income and a good way, and therefore the demand is not very sensitive to changes in the income statement. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Accounting & Financial Management section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Accounting & Financial Management essays

  1. A2 Business CourseWork

    This is why Tesco have tried to, as much as possible lower and cut their prices over their competitor. They feel that by keeping as close to or being cheaper than their customer is an important step to achieving the best possible market share.

  2. Business Income and Expenditure

    This can be maximised by putting more money into the business if they do want more involvement towards the business or get more shares. Venture Capitalists: is when you put money into the business from the start it's also the same as Business Angels this is known as a capital

  1. The company I'm reporting on is Kraft Foods Incorporated - accounting principles.

    depreciation expense. This of course depends on the number of units the company produces each year. The total units of activity for the entire useful life of the asset are estimated, and these units are dived into depreciable cost. The straight-line method would yield a lower interest expense in some

  2. The maintenance of accurate records supplies the company with the financial data that assists ...

    6 Sep purchases 500 10 Sep sales 750 12 Sep drawings 100 15 Sep wages 200 30 Sep balance c/d 5650 8250 8250 1 Oct balance b/d 5650 Step 1) both, the debit and credit side needs to be totalled.

  1. Income Elasticity Of Demand Applied to Business and Consumers

    Income Elasticity affecting Buisnesses For example: Air Deccan With the economy growing at a rate of about 8%, while the business environment with infectious optimism. The spill over can also be seen in aviation. With just under 14 million passengers flying the domestic sector in 2003, this figure now stands

  2. Autralia's Retail Loan Rate Changes

    to shed funds by lending more in the cash market, resulting in a tendency for the cash rate to fall and vice versa (Lewis, 1998). Figure 3 Source: Bloomberg (as at 24 June 2008 ) Figure 4 Another indicator is the yield curve, the graph of interest rates of different maturities.

  1. Vyaderm Pharma. We will first calculate the 1999 actual EVA retroactively and if ...

    This does not mean that the manager's earned bonus will be capped for good years, it will just stay in his bonus bank. Similarly for really bad years some threshold payout will still be made and in case the bank balance is zero or negative it will be treated as

  2. Explain the difference between capital income, revenue income, capital expenditure and revenue expenditure.

    They will be protected from events such as floods. Public liability insurance- this insurance will be taken out by Future Fashion to protect people within the building who may be harmed during an incident. Administrative costs Administration is all about paperwork within the Future Fashion such as paperwork regarding employees, suppliers and customers.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work