What Is Income Elasticity of Demand?

In economics, the elasticity of demand and income measures the degree to which consumers' demand for a certain good or service responds to changes in income. Same as "income elasticity of demand". (In economics, income elasticity of demand measures the responsiveness of the demand for a good to a change in the income of the people demanding the good, ceteris paribus.)

Demand income elasticity

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In economics, the elasticity of demand and income measures the degree to which consumers respond to changes in demand for a particular good or service, and so on. with"

Express demand income in Em

There are five possible demand income curves:

1. High demand income elasticity (rich income elasticity)

In this case, the proportion of demand growth is greater than the proportion of income growth. In this case, the coefficient Em> unit is 1. Example: Income increases by 10% and demand increases by 20%.

2. Unit demand income elasticity

In this case, the proportion of demand growth is equal to the proportion of income growth. In this case, the coefficient Em = unit 1. Example: Revenue increases by 10% and demand increases by 10%.

3. Low demand income elasticity (lack of income elasticity)

In this case, the proportion of demand growth is smaller than the proportion of income growth. In this case, the coefficient Em <unit is 1. Example: Revenue increases by 10% and demand increases by 5%.

4, 0 Demand income elasticity

In this case, the demand for income change remains constant. The coefficient Em = 0 at this time. Example: Income increased by 10%, and demand remained unchanged.

5. Negative demand income elasticity

In this case, with the increase in income, the demand decreases. The coefficient Em <0 at this time. Example: Income increases by 10% and demand decreases by 5%.

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(1) The extent to which the product is "needed". In developed countries, people's incomes have increased, and the demand for expensive goods has increased rapidly. Demand for basic goods such as bread has increased only slightly. Thus, the income elasticity of automobiles and vacations abroad is very high, while goods or services such as potato and bus travel The income elasticity of demand is low, sometimes even negative. For low-grade goods, as income increases, the demand for goods decreases, so the income elasticity of demand for these goods is negative.

(2) Satisfaction of goods with people's desires. The faster people's desires are consumed when consuming a commodity, the less the demand will increase as income increases.

(3) Income level. The poor and the rich react differently when their income increases. With the same income increase, the poor will buy more butter, and the rich will only buy a little more.

The income elasticity of demand is of great significance for enterprises when considering the future market size of products. If the income elasticity of product demand is high, sales may increase rapidly when domestic income increases, but there will be a significant decline during economic recession.