6 : income elasticity ( Mr William )

Question 1

define income elasticity (YED)

Answer 1

the sensitivity of demand to changes in income:
meaning that as income increases, the demand for that good increases even more proportionally

Question 2

what are luxury items and why are they income elastic ?

Answer 2

are items like fine wine , luxury chocolates , cars . they are income elastic because as income goes down so will demand and as income rises so will demand .

Question 3

what are necessities and why are they income inelastic ?

Answer 3

are items like . shampoo , toothpaste , bread. they are income inelastic because as income rises demand will not.

Question 4

what are inferior goods and why are they income elasticity negative

Answer 4

are goods like jam, tinned meat. their income elasticity in negative because as income rises demand falls .

Question 5

what is the formula for income elasticity (YED)

Answer 5

% change in income

: since it is percentage change we need to convert raw numbers to %
to do this :

difference or number
——————————— x 100
original number

and then you put the % in its place in the formula

Question 6

why is income elasticity important to government ?

Answer 6

• tax : government can impose different tax rates based on the type of goods e.g. like food or medicine may have low or no taxes.
• production and income elasticity : the income elasticity of the different types of goods gives and idea to the producers as to what kind of goods should be produced depending upon the nature of the economy
• business cycle : knowing the income elasticity of goods helps businesses and governments predict how different products will be affected by changes in income.