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
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.
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?
|Old 100||New 125||Old (loaves) 200||New (loaves) 300|
1(a) Percentage change in quantity demanded
= New Qd – Old Qd x 100
Old Qd 1
= 300 – 200 x 100
= 100 x 100
(b) Percentage changes in income
= New income – old income x 100
Old income 1
= 125 – 100 x 100
= 25 x 100
Income elasticity = %DQd
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.
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