Determinants Of Income Elasticity Of Demand

I a necessity that has no close substitute salt newspaper polish etc will have an inelastic demand because its consumptions cannot be postponed.

Determinants of income elasticity of demand. Consumer s income is one of the important determinants of demand for a product. The greater the proportion of income spent on a commodity the greater will be generally its elasticity of demand and vice versa. Apart from the price there are several other factors that influence the elasticity of demand. The demand for a product and consumer s income are directly related to each other unlike price demand relationship.

Another important determinant of the elasticity of demand is how much it accounts for in consumer s budget. It is seen that the percentage of income spent on food declines as the level of income increases. A good with more close substitutes will likely have a higher elasticity. For high income groups the demand is said to be less elastic as the rise or fall in the price will not have much effect on the demand for a product.

Income elasticity of demand means the ratio of the percentage change in the quantity demanded to the percentage in income watson. Determinants of elasticity of demand. This is known engel s law. Whereas in case of the low income groups the demand is said to be elastic and rise and fall in the price have a.

Commodities are classified as necessities luxuries and comforts. Income elasticity of demand includes positive income elasticity negative income elasticity and zero income elasticity. For non durable goods the longer a price change holds the higher the elasticity is likely to be. The main determinants of income elasticity of demand nature of the need the good covers.

The income elasticity of demand for a particular product can be negative or positive or even unresponsive. Followings are the main determinants of elasticity of demand. Determinants of elasticity of demand. Income elasticity of demand yed change in quantity demanded change in income.

Taking income on the vertical axis and the quantity demanded on the horizontal axis the increase in demand q. The higher the percentage of a consumer s income used to pay for the product the higher the elasticity tends to be. The higher the income elasticity of demand for a specific product the more responsive it becomes the change in consumers income. Assuming prices of all other goods as constant if the income of the consumer increases by 5 and as a result his purchases of the commodity increase by 10 then e 10 5 2 1.

Now we can measure the income elasticity of demand for different products by categorizing them as inferior goods and normal goods.