Explain Income elasticity of demand.

Income elasticity of demand : A persons demand for a good may change with his\her change in income. The income elasticity of demand is the ratio of percentage change quantity purchased per time to the percentage change in income. Thus,

Here, em = Income elasticity of demand
            m = initial income
            Q = initial quantity
            Δm = change in income
            ΔQ = change in quantity

Example : Let a persons income changed to $1500 from $1000 and the person’s increase in the demand for X commodity is 5000 units from 2000 units. Thus,

            m = $1000                 Q = 2000 units
            Δm = $500                 ΔQ = 3000 units

The income elasticity of demand,

Thus, the income elasticity is 3.

Google Recommends Recommends


Contact Us