Income Elasticity Of Demand Luxury Goods

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 of demand luxury goods. The more elastic the demand is the greater the consumer response following a change in their income. A positive income elasticity of demand is associated with normal goods. For example diamonds are a luxury good that is income elastic. This also means however that should there be a decline in income its demand will drop more than proportionately.

Suppose consumer income increases by 8 percent and demand for production increased by 10 percent. As people become wealthier they will buy proportionately more luxury goods. Income elasticity for luxury goods is greater than 1. Using knowledge of income elasticity of demand firms will make use of income elasticity of demand by producing more luxury goods during periods of economic growth.

Normal goods whose income elasticity of demand is between zero and one are. Normal goods have a positive income elasticity of demand. 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. Income elasticity of demand for a luxury good luxury goods usually have income elasticity of demand 1 which means they are income elastic.

If income elasticity of demand of a commodity is less than 1 it is a necessity good. This means that the demand for these products fluctuates directly with the level of consumer income. An increase in income will lead to a rise in demand. This implies that consumer demand is more responsive to a change in income.

In a recession with falling incomes supermarkets might be advised to promote more value inferior goods. 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. Luxury goods are sensitive to changes in consumer income because they have a high income elasticity of demand. This means that the increase in demand is more than a proportional increase in consumer income.

Luxury goods have high income elasticity of demand.