Meaning:
The Income Elasticity of Demand measures
the rate of response of quantity demand due to a raise (or lowering) in a
consumers income. The formula for the Income Elasticity of Demand (IEoD) is
given by:
IEoD = (% Change in Quantity
Demanded)/(% Change in Income)
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Numerical calculation of income
elasticity
Now let us consider the data given below
and calculate the income elasticity of demand.
Income of the consumer =Rs.5000/-
Increased income =Rs.6000/- Original demand for butter = 2 Kg Increased demand
for butter =2.50 Kg
From the data we get,
∆q =0.50
∆y =1000
y =5000
q =2
Substituting these values in the formula
for income elasticity we get,
Ey =(∆q/∆y)(y/q)
=(0.50/1000)(5000/2)
=5/4
=1.25
Normal Good: A normal good
exists if an increase in income causes an increase in demand. This is seen as a
positive value for the income elasticity of demand, or a coefficient of
elasticity of N > 0.
Inferior Good: An inferior
good exists if an increase in income causes a decrease in demand. This is seen
as a negative value for the income elasticity of demand, or a coefficient of
elasticity of N < 0.
A normal good can also be classified as
either elastic or inelastic, depending on the value of the income elasticity
relative to 1. An inelastic normal good has a positive coefficient that is less
than 1, 0 < N < 1. In contrast, an elastic normal good has a positive
coefficient that is greater than 1, N > 1. This last case is commonly termed
a luxury or superior good.
Superior Good: A superior
good exists if a relatively small increase in income causes a relatively large
increase in demand. This is seen as a positive value for the income elasticity
of demand greater than 1, or a coefficient of elasticity of N > 1.
Types of Elasticity:
A Beginner's Guide to Price Elasticity
Price Elasticity of Demand
Price Elasticity of Supply
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