How Markets Work - Income Elasticity of Demand

This is a revision presentation on income and elasticity of demand

The link between income and demand is explored when we cover income elasticity of demand. The most important distinction to make in this section is between normal and inferior products. Please also be clear on the difference between a normal necessity and a normal luxury.

The coefficient of income elasticity is important for businesses because it helps them to forecast, other factors remaining the same, how demand for their goods and services will be affected by changes in the real incomes of consumers as an economy moves through the various stages of a business cycle.

Producers of inferior goods tend to do well when an economy is in recession or when real wages are falling!