WHAT IS INCOME DEMAND

INCOME DEMAND

What is income demand? Income elasticity of demand is defined as the degree of responsiveness of demand to changes in income of consumers. In other words, it measures how changes in income of consumers will affect the quantity of commodities demanded by such consumers.

It should be noted that income elasticity of demand is negative for inferior goods since an increase in income will lead to decreased demand for them.

Measurement of income elasticity of demand

Income elasticity of demand can be measured or calculated by using the co-efficient of income elasticity of demand. Thus, co-efficient of income elasticity of demand

=         Percentage change in qty demanded

Percentage change in income

=          % DOd

% D1

Types of income elasticity of demand

  • Positive income elasticity of demand: This is the type of income elasticity of demand in which an

  increase in income of consumers will equally lead to an increase in the quantity of commodity demanded. This is applicable mainly to normal commodities.

  • Negative income elasticity of demand: This is the type of income elasticity of demand in which an increase in income of consumers will lead to a decrease in the quantity of commodities demanded. In this case as income increases, demand for commodities falls. This is applicable to inferior goods.

Worked example

A weekly income of a clerk was increased from 6 100 to 6 125 as a result of his promotion in

the office. He is able to purchase 300 loaves of bread instead of200 per week.

  • Calculate the co-efficient of his income elasticity of demand.
  • Is the demand elastic or inelastic? Why?
  • What kind of goods is bread to the consumer?

Solution

IncomeQuantity demanded
Old 100New 125Old (loaves) 200New (loaves) 300

1(a)      Percentage change in quantity demanded

            =          New Qd – Old Qd      x          100

                        Old Qd                                                1

            =          300 – 200        x          100

                        200                              1

            =          100      x          100

                        20                    1

            =          5%

(b)        Percentage changes in income

            =          New income – old income      x          100

                        Old income                                         1

            =          125 – 100        x          100

                        100                              1

            =          25        x          100

                        100                  1

            Income elasticity         =    %DQd

                                                %D income

            =          50%

                        25%     =          2.0

The co-efficient of income elasticity is = 2

(2)      The co-efficient of elasticity of demand is elastic. It is elastic because elasticity is greater than 1.

(3)        The kind of goods bread is to tl consumer is a normal good because i the income increases, his demand for bread also increases, thus, indicating a positive type of income elasticity demand.

let us know what you think

This site uses Akismet to reduce spam. Learn how your comment data is processed.