Income elasticity of demand measures the relationship between a change in quantity demanded for good X and a change in real income.
The formula for calculating income elasticity is:
% Change in demand divided by the % change in income
The income elasticity of demand is usually strongly positive for
In contrast, income elasticity of demand is lower for
How do businesses make use of estimates of income elasticity of demand?
Knowledge of income elasticity of demand helps firms predict the effect of an economic cycle on sales. Luxury products with high income elasticity see greater sales volatility over the business cycle than necessities where demand from consumers is less sensitive to changes in the cycle.
Income elasticity and the pattern of consumer demand
As we become better off, we can afford to increase our spending on different goods and services. The income elasticity of demand will also affect the pattern of demand over time.
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