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Using income elasticity of demand, explain the difference between normal, necessity, and inferior goods.

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Introduction

´╗┐Paper 1 Essay Practice Question Using income elasticity of demand, explain the difference between normal, necessity, and inferior goods. Income elasticity of demand is a measure of how much the demand for a product changes when there is a change in the consumer?s income. Quantity demanded is the total amount of goods or services that are demanded at any given point in time. Income elasticity of demand is usually calculated using the equation YED = Percentage change in quantity demanded of the product Percentage change in income of the consumer For example, a person has an increase in annual income from $10,000 per year to $11,000 and he then increases his annual spending on branded clothes from $1,000 to $1,200. ...read more.

Middle

which provides the value of +2. The number and sign obtained from the income elasticity of demand equation is very important as the sign (positive or negative) determines if the product studied is a normal good, necessity or inferior good. For normal goods, the value of income elasticity of demand is positive as the demand for the product increases as income increases. If the percentage increase in quantity demanded is less than the percentage increase in income, then the income elasticity of demand value would be between zero and one and the demand for the normal good will be determined as being income-inelastic. If the percentage increase in quantity demanded is greater than the percentage increase in income, then the income elasticity of demand value will be greater than one and the demand for the product will be determined as being income-elastic. ...read more.

Conclusion

For example, the demand for inexpensive, budget-price clothing will fall as income rises as people will now be able to purchase branded clothing as a result of an increase in income. In addition to normal, necessity, and inferior goods, there are also a fourth category of products called superior goods. Superior goods are products that often have a high income elasticity. The demand for them will vary significantly following a rise in income as people have more income to satisfy their needs, they will begin to use their money to purchase products that are wants. These wants are usually non-essential with common examples being computers, phones, electronics and vacations in foreign countries. These products or services are determined as being income-elastic. ...read more.

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