INCOME ELASTICITY OF DEMAND

Sonu Chowdhury

CONTENTS

• Income Elasticity of Demand

• Types of Income Elasticity of Demand

• Practical Application

MEANING OF INCOME ELASTICITY OF

DEMAND

• The extent to which consumer’s demand

fro a particular product changes due to

change in his income.

• It measures the responsiveness of demand

for a commodity to change in the income of

the consumer.

MEASUREMENT OF INCOME

ELASTICITY OF DEMAND

The coefficient of income elasticity of demand is measured

as

• ___________________________% Change in Quantity Demanded

% Change in Consumer’s income

Ei =

KINDS OF INCOME ELASTICITY OF DEMAND

1. Negative Income Elasticity of Demand

2. Zero Income Elasticity

3. Unit Income Elasticity

4. Low Income Elasticity

5. High Income Elasticity

1. Negative Income Elasticity

• When demand fro a product decreases as income increases.

• The demand for inferior goods is of this type.

2. Zero Income Elasticity

• When a change in income has no effect upon the quantity demanded of a product.

• Example: Demand for salt.

A millionaire takes salt in his food just as the poorest of poor does.

3. Unit Income Elasticity

• When demand for a product changes in equal proportion as income increases.

• It is considered to be a dividing line between necessaries and comforts.

4. Low Income Elasticity of Demand

• When income elasticity of demand for a product is positive i.e. greater than zero, but less than one.

• Example: Necessities

5. High Income Elasticity of Demand

• When income elasticity of demand for a product is positive and greater than one.

• Example: Luxuries

USES OF CONCEPT OF INCOME ELASTICITY

OF DEMAND

1. ECONOMIC DEVELOPMENT

2. ECONOMIC FLUCTUATION

3. ECONOMIC PLANNING

4. DEMAND FORECASTING

5. FOREIGN TRADE

TEST OF UNDERSTANDING

There are three income bracket people, very poor,

middle class and the elite class. Following is the list

of items. In one particular month prices of each one

of them rise. How each class will react? Reason out

your answer.

• Potatoes

• Diamonds

• Wheat

• Paper