It is quite common among the working class to enjoy with their family whenever they get a hike. Their first instinct is to buy something new, pamper themselves, or share the experience with their family. Such spree of buying something has a significant impact on the demand for such products. This is what income elasticity of demand is. Let us look more into the details of the income elasticity of demand.
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What is the Income Elasticity of Demand?
According to the Income elasticity of demand definition, it is the elasticity in demands resulting from the changes in the income of the customers. It is expressed as the percent change in the demanded quantity per percent change in income. Mathematically, it is expressed by the income elasticity of demand formula.
Income elasticity of demand (YED)= %change in quantity/ % change in income
If the YED for a particular product is high, it becomes more responsive to the change in consumer's income. The first step to measure YED is to categorize the goods as normal and inferior. It is to be kept in mind that the YED can be positive, negative, or even unresponsive.
How to Find Income Elasticity of Demand?
The best way to understand the topic is to measure the demand responsiveness with respect to the income of the customer. In most cases, the increase in income is directly related to demand. Therefore, the demand for the product will be a nice scenario for how to find income elasticity of demand.
Income Elasticity of Demand: Types
In general, there are five kinds of income elasticity of demand, and these are:
High- An increase in income is associated with an increase in demand.
Unitary- An increase in income is proportionate to the increased demand for quantity.
Low- A rise in income is less proportionate than the demand increase of the quantity.
Zero- A demand quantity remains the same, although income changes.
Negative- A rise in income is related to a decline in the demanded quantity.
The best way to assign the different kinds is by using an income elasticity of demand calculator.
Normal Goods
As said earlier, the income elasticity of demand depends on the quality of the product. For measuring income elasticity, the coefficient is YED. A positive value of YED indicates that the product has an elastic income. Most goods have positive YED. This indicates that when the income increases, the demand also increases.
These normal goods are differentiated into normal luxuries and normal necessities. Compared to the normal luxurious goods, the normal necessity goods have a smaller margin of elasticity in income. The normal necessities goods include fuel, medicine, and milk. Any income elasticity of demand example for normal necessity goods has a YED value between 0 and 1. The demand for normal necessity goods is not controlled by a change in the income of the consumers or changes in price. For a normal necessity product, the percentage of change in demand is less than that in the consumer's income.
Normal luxuries are considered to be highly elastic in income. Luxury goods include jewelry and high-end electronics. Income elasticity of demand example for normal luxury will be to buy HD television or high-tech mobiles with the bonus that the consumer receives.
For normal luxury products, the change in demand percentage is more proportionate to the changes related to income. However, it must be considered that the luxury concept is contextual, depending on the consumer's circumstances.
Inferior Goods
Inferior goods are considered to have a negative income elasticity. The YED value for inferior goods is less than zero. For inferior goods, the demand for goods decreases when the income of the consumer increases. The decrease in demand for inferior goods is attributed to the presence of superior alternatives. For example, public transports are considered to be inferior goods, if the consumer decides to take a cab. Generally, it is found that when there is an increase in income, the consumer prefers to avoid inferior goods, and their demand decreases. However, when the income decreases, the demand for inferior goods increases and the demand curve exhibits an outward swing. Another income elasticity of demand example will be the use of margarine. Butter is the costlier option, but when the income decreases, people opt for margarine, which is the cheaper alternative to butter.
FAQs on Income Elasticity of Demand
Q1. State the Importance and Application of Income Elasticity of Demand.
Answer: There are several applications of the concept of income elasticity of demand. Most businesses and industries use this concept to understand the demand for any product and how it is defined by consumer incomes. For example, if the income increases, the demand for luxury items increases. Therefore, the business can modulate their advertising and marketing strategies to control the demand for the product by studying their income. Such analysis will help in planning for better advertisement and production. By using the income elasticity of demand formula, the companies can predict the same.
Q2. What are Normal Goods in Terms of Income Elasticity of Demand?
Answer: If you want to know how to find income elasticity of demand, then you must use the income elasticity of demand calculator. You will find that there are two types of products in terms of income elasticity- normal and inferior goods. Normal goods are those goods whose quality and the demand for the product increases with the income. They can be of two types- normal necessities and normal luxuries. Normal necessities are those products that are required regularly, like milk. Normal luxuries are those products that are used for luxurious purposes, like android phones.
Q3. What are Inferior Goods in Terms of Income Elasticity of Demand?
Answer: As per the income elasticity of demand formula, those products that have a negative income elasticity are called inferior products. The rise in consumer's income has a negative effect on the demand for such products. Such a situation occurs mainly because of the presence of a superior alternative in the market. However, a decline in consumer's income increases the demand for such products. Such a condition is also called negative income elasticity of demand. Income elasticity of demand example will be the use of margarine, which is a cheaper alternative to butter. If the income is high, people prefer butter. If the income is low, people prefer margarine. The best way to evaluate the demand for a product is by using an income elasticity of demand calculator.