Income and Price Elasticity of Demand (Chain of Reasoning Video)
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Last updated 21 Mar 2021
Here is a chain of reasoning approach to this question: Why might a product have a highly negative income elasticity of demand and a high price elasticity of demand?
Why might a product have a highly negative income elasticity of demand and a high price elasticity of demand?
A product with a negative income elasticity of demand is an inferior good.
This means that, as the real income of a consumer rises, then demand falls at each price level. Economy-own-label products are examples.
If demand for a product is highly elastic, then the coefficient of Ped > 1. This means that the consumer’s demand is sensitive to the market price.
Demand is likely to be price elastic when the good or service has many close substitutes and when it is easy/costless to switch demand.