Income Elasticity Of Demand Less Than 1

Income elasticity of demand can be used as an indicator of future consumption patterns and as a guide to firms investment decisions.

Income elasticity of demand less than 1. For normal necessities income elasticity of demand is positive but less than 1 and for inferior goods where the income elasticity of demand is negative then as income rises the share or proportion of their budget on these products will fall. For normal luxury goods income elasticity of demand exceeds 1 so as incomes rise the proportion of a consumer s income spent on that product will go up. This implies an income elasticity of 1 25. Income elasticity of demand less than one if the percentage change in quantity demand is less than the percentage change in income is known as income elasticity of demand less than one.

Suppose consumer income increases by 8 percent and demand for production increased by 10 percent. Working problems 9 to16 will give you a better under standing of cross and income elasticities of demand. As luxury goods are more income elastic manufacturers of luxury goods can change their marketing and advertising strategies based on the change in consumers income. A zero income elasticity of demand occurs when an increase in income is not associated with a change in the demand of a good.

Income elasticity for luxury goods is greater than 1. Measuring the income elasticity of demand is important for industries and business units as they can then forecast how the demand for their products may change in response to consumer incomes. This means that the increase in demand is more than a proportional increase in consumer income. For example the selected income elasticities.

If income elasticity of demand of a commodity is less than 1 it is a necessity good.