Income elasticity of demand measures the responsiveness of demand to changes in income. Explain what is happening to demand and what kind of good is being represented in the following situations. Income is rising, and income elasticity of demand is positive. Income is rising, and income elasticity of demand is negative. Income is falling, and income elasticity of demand is positive. Income is falling, and income elasticity of demand is negative.
Q.5
Income elasticity of
- Income is rising, and income elasticity of demand is positive.
- Income is rising, and income elasticity of demand is negative.
- Income is falling, and income elasticity of demand is positive.
- Income is falling, and income elasticity of demand is negative.
Income elasticity is defined as the responsiveness of the quantity demanded of the commodity towards any change in the income of the consumer. Mathematically, it can be calculated as the percentage change in the quantity demanded divided by the percentage change in the income.
a. Normal goods refer to those goods, whose consumption rises with the level of income or purchasing power, i.e. normal goods have positive income elasticity (1% increase in the purchasing power also increases the quantity demanded of the good). Hence, when the price of a good decrease, the purchasing power of the consumers increase and so, due to the income effect the quantity demanded increases and similarly quantity demanded decreases due to an increase in price.
In the given scenario, there is an increase in income, and income elasticity of demand is positive which implies that the percentage change in quantity demanded is also positive. This situation is only possible when there is increasing demand. Therefore, we can conclude that the demand for the given commodity is increasing. The commodity that is being represented in the given scenario is normal good because it is only in the case of a normal good that there is an increase in demand with increasing income.
b. An inferior good is defined as the good for which the demand decreases with the increase in the wage rate. In the case of an inferior good, there is an inverse relationship between the quantity demanded and income i.e, as one's income increases, he demands lesser of the good while demands more with a decrease in income. So, the income elasticity of an inferior good is always negative i.e, less than zero.
In the given scenario, there is an increase in income, and income elasticity of demand is negative which implies that the percentage change in quantity demanded is also negative. This situation is only possible when there is decreasing demand. Therefore, we can conclude that the demand for the given commodity is decreasing. The commodity that is being represented in the given scenario is an inferior good because it is only in the case of an inferior good that there is a decrease in demand with increasing income.
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