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Income Elasticity of demand

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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.

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