Economics Supply And Demand Questions
Income elasticity of demand is a measure that quantifies the responsiveness of the quantity demanded of a good or service to changes in income. It is calculated by dividing the percentage change in quantity demanded by the percentage change in income.
Income elasticity of demand can be positive, negative, or zero. A positive income elasticity of demand indicates that the good is a normal good, meaning that as income increases, the demand for the good also increases. A negative income elasticity of demand indicates that the good is an inferior good, meaning that as income increases, the demand for the good decreases. A zero income elasticity of demand indicates that the good is income inelastic, meaning that changes in income have no significant impact on the demand for the good.
Understanding income elasticity of demand is crucial for businesses and policymakers as it helps predict how changes in income levels will affect the demand for goods and services. This information can be used to make informed decisions regarding pricing, production, and resource allocation.