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

Explain, using the concept of income elasticity of demand how a fall in income affects the demand of inferior goods and necessity goods. [8]

Extracts from this document...

Introduction

Transfer-Encoding: chunked O/N 15 P21 1. Explain, using the concept of income elasticity of demand how a fall in income affects the demand of inferior goods and necessity goods. [8] The term income elasticity of demand is a measure of the responsiveness of the quantity demanded of a certain good in relation to changes in the incomes in a country. This is calculated by dividing the percentage change in quantity by the percentage change in the income. The values achieved can as such be either positive or negative. ...read more.

Middle

of the income spent on the goods increases as well, and necessity goods, which would be goods where the value of the income elasticity of demand is between 1 and 0, thus meaning that while demand increases with increases with income, the proportion of the income spent on such goods falls with an increases in income. In relation to a fall in the level of income, the demand for an inferior good is going to increase. This is caused by the fact that inferior goods are the most basic and low priced version of a good. ...read more.

Conclusion

When in comes to necessity goods, as their income elasticity of demand is still positive, a fall in incomes will lead to a fall in the demand at all price levels. However, as the YED will be lower than 1, even though the demand falls, the percentage of the income spent on such goods will increase as the fall in demand will be proportionately lower than the fall in the incomes. This is because most people will be unlikely to cut back on consumption of necessity goods such as food, medicine, housing, etc., even if their income falls. ...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 Markets & Managing the Economy 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 Markets & Managing the Economy essays

  1. Price Elasticity and Income Elasticity of Demand

    Normally, laptops are a big proportion of a consumer?s expenditure and that it is used over a long period of time. This causes laptops to be of elastic nature. (b) Examine the importance to producers of price elasticity of demand and income elasticity of demand.

  2. Explain, with examples, the significance of the value of a goods cross-elasticity of demand ...

    The value will show the extent to which the two complements are necessary for each other, or the extent to which they complement each other. In the case for something such as mobile phones and mobile phone cases, mobile phones are likely to have a relatively low cross elasticity of

  1. Discuss the usefulness to a business of a knowledge of price elasticity of demand ...

    There may be inaccuracies in the calculation process or the sample may be unrepresentative, which would lead to the figures found being misleading and as such can lead to poor decisions being made if the firm relies to heavily on them.

  2. Measuring National Income

    This could be caused by various factors such as low levels of literacy. In countries with low levels of literacy, it is difficult to gather information about economic activity because some people are unable to fill tax forms. There is also the problem of people not declaring to authorities the income they earn.

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