Income Elasticity Of Demand Applied to Business and Consumers

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Income Elasticity Of Demand Applied to Business and Consumers

It is important to note that price is less of a consideration when income goes up. "Income elasticity of demand measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good." (McConnell and Brue, 2005, p.356).

Income Elasticity affecting consumers

A key determinant of demand is income. As the increase in income in general we buy more goods than normal and inferior goods. Income elasticity of demand They are defined as the percent change in the quantity (DQ%) percent more change in income (DY%)

Ey = DQ% / DY%

Unlike the price elasticity of demand that we take only absolute (positive number), income elasticity of demand May be negative or positive. A negative income elasticity means that the recipient is a good than good. A positive income elasticity of demand means that the recipient is a good means good.

In addition, as increased income people generally spend the extra income on necessity items such as housing, food or transportation, but the pleasure or luxury goods. Hence, the need for goods generally have an income elasticity of less than one and luxury and fun items have an income elasticity of more than one.

Example: A person's monthly income increased from $ 3200 to $ 3400. She spends a portion of its income on food by eating outside twice a week rather than once. What is the income elasticity of demand for food that person.

Solution: Percent change in income is DY% = 100 (Y2 - Y1) / Y1 = 100 (3400 - 3200) / 3200 = 6.25%. Change percent of the quantity is DQ% = 100%. Therefore, income elasticity of demand for outside to eat this person is ey = DQ% / DY% = 100% / 6.25% = 16.

Income Elasticity affecting Buisnesses

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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 at nearly 28 billion domestic market is growing at almost 50%.
GR Gopinath, the man who pioneered aviation weak in the face in India, firstly looking at this opportunity. With a new concept of luxury not low fares airline, which broke into the market 3 years and today enjoys a market share ...

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