INCOME ELASTICITY OF DEMAND

Income elasticity of demand is the degree of responsiveness of quantity  demanded of a commodity to a little change in consumer’s income. That is, it measures how changes in income of consumers will affect the quantity of commodities demanded by such consumers.

Mathematically, income elasticity of demand is expressed as:

% change in Quantity Demanded

% change in Income

When the percentage change in income brings about an equal change in the quantity demanded, then income elasticity is unit.

When the percentage change in income is greater than the percentage change in quantity demanded, income elasticity is less than unit, hence income is inelastic.

When the percentage change in quantity demanded is greater than the percentage change in income, then income elasticity is greater than unit, hence income elasticity is elastic.

TYPES OF INCOME ELASTICITY OF DEMAND

1. Positive Income Elasticity of Demand: is the type of income elasticity of demand in which an increase in income of consumer will equally lead to an increase in the quantity of commodity demanded. This is applicable majorly to normal goods.
2. Negative Income Elasticity of Demand: is the type in which an increase in income of consumers will lead to a decrease in the quantity of commodity demanded. This is applicable to inferior goods.

 

EVALUATION

1. Define income elasticity of demand.
2. State the formula for calculating income elasticity of demand.

 

Illustration: The table below shows the various income and demand for different commodities.

Income                                   Quantity Demanded

#                                                    Kg

1. 20,000             120
2. 36,000               96
3. 40,000              160
4. 44,000              200
5. 45,000              240
6. 47,000              252
7. a) Calculate the income elasticity between (i) A and B (ii) C and D  (iii) E and F
8. b) What kind of good relationship is between (i) A and B (ii) C and D

 

SOLUTION

Income Elasticity of Demand      =        % Change in Quantity Demanded

% Change in Income

(a)        Income Elasticity of Demand

i           Between A and B

= 120– 96 x 100

120                                       = 0.25

36000 – 20,000 x 1000

20,000

ii           Between C and D

200 – 160 x 100

160                                            = 2.5

44000 – 40,000 x 100

40,000

iii          Between E and F

252   –    240    x 100

240

= 1.125

47000 –  45000 x 100

45000

(b)   i.    Giffen goods or inferior good

1. Normal goods

It should be re-emphasized that positive income elasticity of demand is for ‘normal’ or ‘superior’ or ‘luxury goods’, whereas Negative income elasticity of demand is for ‘abnormal’, or ‘inferior goods.

 

EVALUATION

1. What is income elasticity of demand?
2. Explain two types of income elasticity of demand

 

GENERAL EVALUATION QUESTIONS

1. Explain five reasons why a joint stock company is preferable to a one-man business.
2. State the law of Diminishing returns.
3. Define Labour as a factor of production.
4. What are the factors affecting the size of a firm?
5. Distinguish between fixed and variable cost.

 

WEEKEND ASSIGNMENT

1. The responsiveness of demand to a change in income is the measurement of_______(a) arc elasticity of demand (b) cross elasticity of demand (c) income elasticity of demand (d) Price elasticity of demand
2. Given the income of A and B as________

Income              Quantity demanded  kg

A          20,000                       120

B          36,000                       96

The income elasticity between A and B is ________

            (a) 0.25     (b) 0.95       (c)  2.3      (d)  2.7

3. What kind of good is between A and B above?

(a)  private good          (b)  public good   (c)  luxury    (d)  necessity

4. Given income  C and D and quantity demanded as follows:

Income                       Quantity Demanded

40,000                                     160

44,000                                     200

Calculate the coefficient of income elasticity of demand

(a)  2.5     (b) 4.7    (c) 0.44     (d) 6.5

5. When an increase in consumer’s income leads to a decrease in quantity demanded of a commodity, income elasticity of demand is…………? (a) indeterminable  (b) positive (c) constant (d) negative
6. Income elasticity of demand is negative for…………… (a) normal goods (b) competitive goods (c) inferior goods (d) complementary goods

 

SECTION B

1. Differentiate between normal goods and inferior goods
2. The table below shows the various incomers and demand for different commodities.

 

Income     Quantity Demanded (kg)

A          10,000             60

B          18,000             48

C          20,000             80

D          22,000             100

E          22,500             120

F          23,500             126

(b)  Calculate the income elasticity between      (i) A and B (ii) C and D (iii) E and F

(b)  What kind of good is between : (i) A and B  (ii) C and D

 

See also

ELASTICITY OF SUPPLY

ELASTICITY OF DEMAND

DEMAND AND SUPPLY

THEORY OF CONSUMER BEHAVIOUR

MEASURES OF DISPERSION