Marketing: Income Elasticity of Demand

Question 1

What is Elasticity?

Answer 1

Measures responsiveness of demand to a change in a relevant variable - such as price or income.

Question 2

Income Elasticity of Demand definition:

Answer 2

Measures extent to which quantity of product demanded is affected by change in income.

Question 3

Income Elasticity of Demand formula:

Answer 3

% Change in Income

Question 4

Income Elasticity: Luxuries and Necessities:

Answer 4

Luxuries

• Income elasticity more than one
• As income grows, proportionally more spent on luxuries

Necessities

• Income elasticity less than 1, but more than 0
• As income grows, proportionally less spent on necessities

Question 5

Interpreting Income Elasticity of Demand:

Answer 5

Most normal products

• Rise in consumer income will result in rise in demand
• Fall in consumer income will result in fall in demand

Extent of the change (elasticity)
- Will vary depending on type of product (e.g. luxury v necessity)

Question 6

Inferior goods (negative income elasticity):

Answer 6

• As income rises demand falls

- IED is negative (less than 0)

Question 7

Why does demand fall for inferior goods?

Answer 7

• Consumers switch to better alternatives

- Substitute products become affordable