Economics Elasticity Of Demand Questions Medium
The different types of income elasticity of demand are as follows:
1. Positive income elasticity of demand: This occurs when the quantity demanded of a good or service increases as income increases. In other words, the demand for the good is income elastic. For example, luxury goods such as high-end cars or designer clothing often have positive income elasticity of demand, as people tend to buy more of these goods as their income rises.
2. Negative income elasticity of demand: This happens when the quantity demanded of a good or service decreases as income increases. In this case, the demand for the good is income inelastic. For instance, basic necessities like rice or bread usually have negative income elasticity of demand, as people spend a smaller proportion of their income on these goods as their income rises.
3. Zero income elasticity of demand: This occurs when the quantity demanded of a good or service remains constant regardless of changes in income. In other words, the demand for the good is income unitary elastic. For example, goods that are considered to be essential but not income-sensitive, such as medications or utilities, often have zero income elasticity of demand.
Understanding the different types of income elasticity of demand is crucial for businesses and policymakers as it helps them predict how changes in income will affect the demand for different goods and services. This knowledge can guide pricing strategies, production decisions, and government policies aimed at promoting economic growth and stability.