INCOME ELASTICITY OF DEMAND. What is income demand? Income elasticity of demand is defined as the degree of responsiveness of demand to changes in the income of consumers. In other words, it measures how changes in the income of consumers will affect the quantity of commodities demanded by such consumers.
It should be noted that the income elasticity of demand is negative for inferior goods since an increase in income will lead to decreased demand for them.
Income elasticity of demand (YED) is a measure of how sensitive the quantity demanded of a good or service is to changes in consumer income. It is expressed as the percentage change in quantity demanded divided by the percentage change in consumer income.
The formula for income elasticity of demand is:
YED = (Percentage change in quantity demanded) / (Percentage change in consumer income)
If the value of YED is positive, the good or service is said to be a normal good, which means that as income increases, the quantity demanded of the good or service also increases. If the value of YED is negative, the good or service is said to be an inferior good, which means that as income increases, the quantity demanded of the good or service decreases.
If the value of YED is greater than 1, the good or service is said to be a luxury good, which means that as income increases, the quantity demanded of the good or service increases at a greater rate than income. If the value of YED is less than 1, the good or service is said to be a necessity, which means that as income increases, the quantity demanded of the good or service increases, but at a slower rate than income.
The concept of income elasticity of demand is important for businesses and policymakers because it helps them to understand how changes in consumer income may affect consumer behaviour and demand for their products or services.
Measurement of income elasticity of demand
The income elasticity of demand can be measured or calculated by using the coefficient of income elasticity of demand. Thus, the 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 the 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 the income of consumers will lead to a decrease in the number 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 of 200 per week.
- Calculate the coefficient of his income elasticity of demand.
- Is the demand elastic or inelastic? Why?
- What kind of goods is bread to the consumer?
Solution
| Income | Quantity demanded | ||
| 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
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 coefficient of income elasticity is = 2
(2) The coefficient of elasticity of demand is elastic. It is elastic because elasticity is greater than 1.
(3) The kind of goods bread is too 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.
The elasticity of demand is a concept in economics that measures the responsiveness of the quantity demanded of a good or service to changes in its price. It is expressed as the percentage change in quantity demanded divided by the percentage change in price.
The formula for price elasticity of demand (PED) is:
PED = (Percentage change in quantity demanded) / (Percentage change in price)
If the value of PED is greater than 1, demand is said to be elastic, meaning that a small change in price results in a relatively large change in quantity demanded. If PED is less than 1, demand is said to be inelastic, meaning that a change in price results in a relatively small change in quantity demanded. If PED is equal to 1, demand is said to be unit elastic, meaning that a change in price results in an equal percentage change in quantity demanded.
The concept of elasticity of demand is important for businesses and policymakers because it helps them to understand how changes in price may affect consumer behaviour, and therefore, their revenue and profitability.
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148. NEWCASTLE DISEASE
149. BACTERIA DISEASES
150. ANTHRAX
151. BRUCELLOSIS
152. TUBERCULOSIS
153. FUNGAL DISEASES
