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Essay On Income Elasticity

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DEFINITION
Income elasticity is the responsiveness of the demand for a good when there is a variation in consumer income. When income changes the demand we have for a certain goods changes. In other words how much demand of a particular good rise or decline when your own income increases or decreases. An increase in income, with other factors fixed such as prices fixed, causes consumers to alter their choice of goods.

FORMULA
Income elasticity can be measured by the proportionatal change in quantity demanded by the proportionatal change in income.

INCOME ELASTICITY = PERCENTAGE CHANGE IN QUANTITY DEMANDED PERCENTAGE CHANGE IN INCOME

For example Maria had a promotion in her job and her income …show more content…

This means that your income has no change on the demand for these goods. You cannot live without these goods and cannot cut down their consumption. An example of sticky goods is salt. Unlike the case of milk where you can cut down the consumption a little but you cannot cut down the consumption of salt. The demand for salt will remain the same for a person regardless of his/her income. Applications of Income elasticity:
1. Helps in determining the rate of growth of the firm:
On the off chance that the development rate of the economy and pay growth of the general population is a reasonable forecast, all things considered it is conceivable to anticipate expected increment in the offers of a firm and the other way around

2. Helps in forecasting the demand of a firm:
Demand greatly depends upon the income elasticity of a product. The more income inelastic the good is the greater the demand would be

3. Aids in marketing and production planning:
Having knowledge of income elasticity of a product helps in planning resources of a business which include production planning, formulating a marketing strategy, deciding and dividing expenditures. Example choosing a distribution

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