Understanding Demand Elasticity
Income elasticity of demand reflects the relationship between demand for a good and income changes. It could be positive, negative, or unaffected by income. Demand for a normal good rises with an increase in income and falls with a decrease, assuming other factors remain constant. A high income elasticity denotes larger demand changes with income fluctuations.
Explanation of Demand Elasticity
Income elasticity shows the responsiveness of demand to income alterations. Higher elasticity represents significant demand changes with income shifts, while lower suggests minor changes. Understanding income elasticity helps governments and businesses anticipate product demand based on economic income changes, and identify whether it's inelastic or elastic. Depending on the type of good, income elasticity can be positive (normal good) or negative (inferior good).
Calculating Income Elasticity of Demand
The Income Elasticity of Demand (YED) is calculated by dividing the percentage change in quantity demanded by the percentage change in income. The formula is represented as:
Income Elasticity of Demand = [(New Quantity Demand - Old Quantity Demand) / Old Quantity Demand] / [(New Income - Old Income) / Old Income]