Essay On Negative Income Elasticity
Demand elasticity is the responsiveness of the outside economic factors for the demand of the goods and services. Mainly there are three demand elasticities;
1) Price elasticity of demand Responsiveness of price variation a considered good or service for the variation of demand
2) Cross Price elasticity of demand Responsiveness of price variation another good or service for the variation of demand
3) Income elasticity of demand Responsiveness of Consumer’s income for the variation of demand Generally demand for a specific good or service will fluctuate in different percentages corresponding to the fluctuation of external factor (elasticity factor). If the quantity demand variation is greater than the elasticity factor variation that
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Even though the income increases these kinds of goods have a reduction of demand. And vice versa situation also can be happened. Considering about the bicycle we can understand the situation of negative income elasticity of demand. When the income increases people more likely to buy the vehicles rather than bicycles. Therefore change of demand gets negative while change of income is positive.
Figure 8.Demand curve for negative income elasticity of
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Most of the customers buy goods and services to fulfil their requirements when the income elasticity is high. For example, people need food, water, shelter and their personal items. When the people are in the situation of limited income, they would cut back on luxury items. As a result of this, in a situation like this more marketing decisions have to be taken to sell their goods and services. To incentive the products they have to include discounts for their products as well as the long term period to pay back. In a situation of positive income elasticity of demand and the change of income is negative, small companies are the most affected party in the industry. So they have to lower their prices to compete with generic
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