Income elasticity of demand Flashcards
What does income elasticity of demand measure?
Income elasticity of demand measures the degree of responsiveness of the quantity demanded of a good to changes in income.
What happens to demand for normal goods as income increases?
For normal goods, demand increases as income increases; they have positive income elasticity.
What happens to demand for inferior goods as income increases?
For inferior goods, demand decreases as income increases; they have negative income elasticity.
What is zero income elasticity of demand?
Zero income elasticity means demand remains constant when incomes change, often observed with certain necessities.
Why does demand for inferior goods fall when income rises?
Demand for inferior goods falls as consumers switch to higher-quality or brand-name goods perceived as better.
How should the income elasticity coefficient be stated?
The coefficient should always include a + or - sign to indicate the direction of the relationship.
What types of goods have positive income elasticity?
Goods with positive income elasticity are normal goods, where demand increases as income increases.
What types of goods have negative income elasticity?
Goods with negative income elasticity are inferior goods, where demand decreases as income increases.
Can income elasticity of demand vary across products?
Yes, income elasticity can vary based on the nature of the product and consumer preferences.
What are examples of normal goods?
Examples of normal goods include branded clothing, cars, and electronics, where demand rises with income.
What are examples of inferior goods?
Examples of inferior goods include generic or store-brand products and tinned vegetables, where demand falls as income rises.
How does income elasticity affect business decisions?
Understanding income elasticity helps businesses predict changes in demand based on economic trends and adjust production and pricing.
What is the significance of a high positive income elasticity?
A high positive income elasticity indicates luxury goods, where demand rises significantly with income increases.
What does a low positive income elasticity indicate?
A low positive income elasticity indicates necessities, where demand rises only slightly with income increases.
How does zero income elasticity apply to necessities?
Zero income elasticity suggests that necessities, such as basic food items, have stable demand regardless of income changes.
