Income elasticity of demand

Question 1

What does income elasticity of demand measure?

Answer 1

Income elasticity of demand measures the degree of responsiveness of the quantity demanded of a good to changes in income.

Question 2

What happens to demand for normal goods as income increases?

Answer 2

For normal goods, demand increases as income increases; they have positive income elasticity.

Question 3

What happens to demand for inferior goods as income increases?

Answer 3

For inferior goods, demand decreases as income increases; they have negative income elasticity.

Question 4

What is zero income elasticity of demand?

Answer 4

Zero income elasticity means demand remains constant when incomes change, often observed with certain necessities.

Question 5

Why does demand for inferior goods fall when income rises?

Answer 5

Demand for inferior goods falls as consumers switch to higher-quality or brand-name goods perceived as better.

Question 6

How should the income elasticity coefficient be stated?

Answer 6

The coefficient should always include a + or - sign to indicate the direction of the relationship.

Question 7

What types of goods have positive income elasticity?

Answer 7

Goods with positive income elasticity are normal goods, where demand increases as income increases.

Question 8

What types of goods have negative income elasticity?

Answer 8

Goods with negative income elasticity are inferior goods, where demand decreases as income increases.

Question 9

Can income elasticity of demand vary across products?

Answer 9

Yes, income elasticity can vary based on the nature of the product and consumer preferences.

Question 10

What are examples of normal goods?

Answer 10

Examples of normal goods include branded clothing, cars, and electronics, where demand rises with income.

Question 11

What are examples of inferior goods?

Answer 11

Examples of inferior goods include generic or store-brand products and tinned vegetables, where demand falls as income rises.

Question 12

How does income elasticity affect business decisions?

Answer 12

Understanding income elasticity helps businesses predict changes in demand based on economic trends and adjust production and pricing.

Question 13

What is the significance of a high positive income elasticity?

Answer 13

A high positive income elasticity indicates luxury goods, where demand rises significantly with income increases.

Question 14

What does a low positive income elasticity indicate?

Answer 14

A low positive income elasticity indicates necessities, where demand rises only slightly with income increases.

Question 15

How does zero income elasticity apply to necessities?

Answer 15

Zero income elasticity suggests that necessities, such as basic food items, have stable demand regardless of income changes.

Question 16

Why is income elasticity important for economic analysis?

Answer 16

Income elasticity is crucial for understanding how changes in consumer income levels impact market demand for different types of goods.

Question 17

How can firms use income elasticity to target different markets?

Answer 17

Firms can focus on products with high positive elasticity for affluent markets and maintain or reduce costs for inferior goods in lower-income markets.