Income elasticity of demand

income elasticity of demand basically measures the relationship between change in quantity demanded for particular good and a change in real income.

1. INCOME ELASTICITY OF DEMAND

2. MEANING OF INCOME ELASTICITY OF DEMAND

3. Income Elasticity of Demand refers to the responsiveness of the quantity demanded for a good or service to a change in the income of the people demanding the good , ceteris paribus.

4. MEASUREMENT / MATHEMATICAL REPRESENTATION OF I.E.D.

5. Mathematically, Income Elasticity of Demand expressed as: e y = % change in quantity demanded of a product % change in income of consumer % change in Q x = Q 2 – Q 1 % change in Y = Y 2 – Y 1 ( Q 2 +Q 1 )/2 (Y 2 + Y 1 )/2 Here, Q X = Quantity demanded of product ‘X’ Q 1 = Initial Quantity demanded Q 2 = New Quantity demanded Y = Income of consumer Y 1 = Initial Income of consumer Y 2 = New Income of consumer

6. Putting the equations together : ey = Q2 – Q1 Y2 – Y1 (Q2 +Q1)/2 (Y2 + Y1)/2

7. Suppose, the monthly income of an individual increases from Rs. 6,000 (Y1) to Rs. 12,000 (Y2). Now, his/her demand for clothes increases from 30 units (Q1) to 60 units (Q2). Q X ( UNITS) Y(RUPEES) 30 6,000 60 12,000

8. TYPES / DEGREES OF INCOME ELASTICITY OF DEMAND

9. Income elasticity of demand is classified into three groups, which are as follows : Positive Income Elasticity of Demand a) Unitary Income Elasticity of Demand b) More than Unitary Income Elasticity of Demand c) Less than Unitary Income Elasticity of Demand Zero Income Elasticity of Demand 3) Negative Income Elasticity of Demand

10. POSITIVE INCOME ELASTICITY OF DEMAND It refers to a situation when the demand for the product increases with increase in the income of the consumer and vice versa. The income elasticity of demand is positive for normal or luxurious goods. It is classified into three categories, namely : a) Unitary Income Elasticity of Demand b ) More than Unitary Income Elasticity of Demand c) Less than Unitary Income Elasticity of Demand

11. (1) UNITARY INCOME ELASTICITY OF DEMAND Percentage change in quantity demanded of a commodity is equal to the percentage change in the income of the consumer. It is represented as e y = 1 Example, income increases by 50% and demand also increases by 50%. The demand curve take the shape of 45 degree.

12. (2) MORE THAN UNITARY I. E. D. Percentage change in quantity demanded of a commodity is greater than the percentage change in income of the consumer. It is represented as e y > 1 Example, income increases by 50% and demand rises by 100%. The demand curve in this case is flatter.

13. (3) LESS THAN UNITARY I. E. D. Percentage change in quantity demanded of a commodity is less than the percentage change in income of the consumer. It is represented as e y < 1 Example, income increases by 50% and demand rises only by 25%. The demand curve for this case is steeper .

14. ZERO INCOME ELASTICITY OF DEMAND Percentage of quantity demanded for a commodity remains constant with the percentage change in income of the consumer. It is represented as e y = 0 The income elasticity of demand is zero in case of essential goods. Example, income increases by 50% and the demand remains constant. The demand curve in this case is a vertical straight line.

15. NEGATIVE INCOME ELASTICITY OF DEMAND The quantity demanded for a commodity decreases with rise in income of the consumer. It is represented as e y < 0 The income elasticity of demand is negative for inferior or giffen goods. Example, income increases by 50% and demand decreases by 25%. The demand curve in this case has downward slope from left to right.

16. CONCLUSION

17. Income Elasticity of Demand is significant as it affects : N ation’s economy Manufacturer / firm # sales forecasting # pricing policy # diversification Business cycle

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