Income elasticity of demand

Question 1

What does income elasticity of demand measure?

Answer 1

It measures how responsive quantity demanded is to changes in income

Question 2

What does the sign ( positive or negative number ) tell you?

Answer 2

It tells you if the product is a normal good or an inferior good

Question 3

What does the size of the number tell you?

Answer 3

It tells you how elastic demand for that good is to changes in income

Question 4

Do normal goods have a positive or negative income elasticity?

Answer 4

They have a positive income elasticity

Question 5

As incomes rise, what happens to demand for normal goods?

Answer 5

It rises

Question 6

Do inferior goods have a positive or negative income elasticity?

Answer 6

They have a negative income elasticity

Question 7

When incomes rise, what happens to the demand for inferior goods?

Answer 7

It falls

Question 8

What are the two types of normal goods?

Answer 8

Normal necessities
Normal luxuries

Question 9

Normal necessities have an income elasticity between which two numbers?

Answer 9

0 and 1

Question 10

Normal luxuries have an income elasticity over what number?

Answer 10

Over 1

Question 11

Give three uses of income elasticity of demand?

Answer 11

Knowledge of income elasticity of demand helps firms to predict the effect of a change in consumer income on demand for their products
Helps the business plan ahead
Product switching - the business may be able to switch the kind of product it makes in relation to rising and falling incomes ( if incomes are rising the business may choose to produce more luxury goods, if incomes are falling then the business may choose to produce more inferior goods)