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Income elasticity of demand

To degree to which the quantity demanded of a good or service is affected by a change in consumer income.

Income elasticity of demand is important because it helps businesses understand how changes in consumers' income levels will affect demand for their products or services. Here are some reasons why it's important:

  • Forecasting: Businesses can use income elasticity to predict how sales might change in response to changes in income levels. This can be helpful for forecasting future sales and making informed business decisions.
  • Pricing strategy: Income elasticity can also inform pricing strategy. For example, if a product has a high income elasticity, meaning that demand increases significantly as income increases, a business may want to set a higher price to capture the extra revenue. Conversely, if a product has a low income elasticity, the business may want to keep prices lower to maintain demand.
  • Target market: Finally, understanding income elasticity can help a business identify its target market.

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