Income Elasticity of Demand

Studying the theory of demand we can assume that there is a relationship between price, income and quantity, but this assumption itself cannot allow us to see how much the quantity demanded is affected by a price change for a good or an income change. This relationship varies from one good to another.

One of the most important of these relationships is income elasticity of demand. The income elasticity of demand is to show how much the quantity demanded depends on changes in income if other factors are constant. The income elasticity is the percentage change in quantity following one-percent change in income if other factors are constant.

The coefficient is mainly positive as with the income increased a consumer buys more of most products, and when the income decreases, the quantity demanded falls.

The income elasticity for food in the United States is about 0,2. A few goods such as dry beans have negative income elasticities. If elasticity is above zero, the product is called a normal good, if elasticity is below zero, the product is an inferior good.

True or false statements:

1. The relationship between price, income and quantity demanded is constant for all goods.

2. The income elasticity of demand shows how much the quantity demanded changes with changes in income.

3. The income elasticity of demand is expressed in percent.

4. The coefficient may be positive and negative.

5. Income elasticity works in opposite directions for normal and inferior goods.

TEXT D

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