Income Elasticity of Demand
Candlefocus EditorA negative income elasticity of demand occurs when the demand for a good or service increases at a slower rate than the income of the consumer increases. This typically occurs when the good or service is either a necessity commodity or an inferior good meaning that more income does not lead to an increase in demand. Common necessities are food, clothing, and shelter.
On the other hand, a positive income elasticity of demand occurs when the demand of a good or service increases at a faster rate than the income of the consumer increases. This typically occurs when the good or service is a luxury item. As the income of the consumer increases, they are more likely to buy the luxury item.
Income elasticity of demand provides useful information for businesses by helping them to predict their future sales. A business whose primary market is composed of individuals with a low income will have a negative income elasticity of demand, and as a result the business should not expect a large increase in demand due to an increase in the general income. Therefore any economic decisions or plans based on an increase in demand should take this into consideration. On the other hand, a business whose target market is composed of people with a high income will have a positive income elasticity of demand. This means that an increase in the general income should lead to an increase in demand and the business should plan accordingly.
Overall, income elasticity of demand is an important measure for businesses when evaluating the impact of a business cycle on demand and sales. The information provided by the measure helps the business to make the right economic decisions and plan ahead based on their target market.