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What is Income Elasticity?
- Income elasticity is the relationship between changes in quantity demanded for specific products and changes in the real income. It is a very significant term in economics. It refers to the sensitivity of the amount which is demanded for a certain thing in response to a particular change in client’s incomes.
- Usual goods have a positive income elasticity of the demand in market. As the income rises, more products are in demand at each and every price level. Obviously luxury goods shall be demand more than normal necessities during increase in general income of customers. This is due to general customer’s psychology.
- Everyone loves to lead a luxurious lifestyle. So with an increase in income, buyers will buy luxury products more than normal daily necessities they buy every other day.
- But the reserve shall be followed with a decrease in income. So quantity demanded by luxurious goods is very much sensitivity to income. Inferior products have a negative income elasticity of the demands.
- This is because the amount of inferior quantity demanded falls as general income rises. For example, generic goods sale decreases during festive seasons.
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