Economics Elasticity Of Demand Questions Medium
The proportion of income spent on a good has a significant impact on the elasticity of demand. Generally, when a larger proportion of income is spent on a good, the demand for that good tends to be more elastic.
When consumers spend a smaller proportion of their income on a good, it means that the good is considered a necessity or an essential item. In this case, even if the price of the good increases, consumers are likely to continue purchasing it because they cannot easily substitute it with other alternatives. Therefore, the demand for such goods tends to be inelastic.
On the other hand, when consumers spend a larger proportion of their income on a good, it indicates that the good is considered a luxury or a non-essential item. If the price of the good increases, consumers have the flexibility to reduce their consumption or switch to cheaper alternatives. As a result, the demand for luxury goods tends to be more elastic.
Additionally, the proportion of income spent on a good also affects the sensitivity of consumers to price changes. When a larger proportion of income is spent on a good, consumers are more likely to be price-sensitive and responsive to changes in price. This makes the demand for such goods more elastic.
In summary, the proportion of income spent on a good is directly related to the elasticity of demand. A larger proportion of income spent on a good leads to a more elastic demand, while a smaller proportion of income spent on a good results in a more inelastic demand.