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

by paulcorcomangmailcom (student)

﻿O/N 15 P21

. 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. A negative value would indicate an inferior good, meaning that for this good, the income is inversely proportional to the demand for the product. Positive values indicate normal goods, meaning that demand increases with income. Such normal goods can then further be classified into two further categories, superior (or luxury) goods, these would be the goods that present an income elasticity greater than 1, meaning that as income increases, not only does demand increases, but the proportion 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. As such, as a fall in incomes is essentially equivalent to an increase in prices, because both would cause an increase in the proportion of one’s income that must be spent on any given product, the fall in incomes causes the price elasticity of demand for all goods to increase, thus causing more people to choose the comparatively ...