income elasticity new

8/3/2019 Income Elasticity New

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14 sep 2011


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` INCOME: Money received during a month, year etc.

especially as a payment of work.

` ELASTICITY: Something that can be stretchable andcan return to its original size.

` DEMAND: Peoples desire for something or somebody

that they want to buy or employ.


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DEFINITION:

According to Stonier and Hague, The IncomeElasticity of Demand shows the way in which aconsumers purchase of any good changes as a

result of change in his/her income.

According to Watson, 'Income elasticity of demandmeans the ratio of the percentage change in thequantity of demand to the percentage change inincome


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Mathematically,

IEOD =

= (I/Dq) * (Dq/ I)

Where,

Dq : Quantity Demanded

I : Disposal Income

Dq : Change in quantity D demanded

I : Change in income


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1. Positive IEOD

Increase in income => Increase in demand of goods.

DEGREES OF IEOD

Q1 Q2 Q3

Quantity

Income

0

I3

I2

I1


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General pattern of +ve IEOD

a) IEOD =1

The change in demand is directly proportiontochange inincome.

I Dq(I = Change in Income

Dq= Change in Quantity Demanded)

Example: Automobile fuel

b) IEOD


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c) IEOD>1

When % change in demand(x)is greaterthan

% change inincome(y).

As, x>y => (x

/y) >1

Example: Luxurious goods(ornaments, perfume)

CONTD


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2. Negative IEOD

It occurs when increase in the income of theconsumers is accompanied by fall in demand of

goods and services.

(Increase in income => Fall in Demand of goods)

D

D

0Q3 Q2 Q1Quantity

Incom

e

I3

I2

I1

Example: Substitute

goods like travellingbyplane in stead oftrain.


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3. Zero IEOD

It is said to exist when increase or decrease in income has

no impact on the demand of goods and services

Example:

Quantity of rice

Drinking water

Servicing automobile Income

Quantity0

XQ

I3

I2

I1


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` Greater significance in production planning and

management in the long run, particularly during the

period of business cycle.

` Estimates future demand(concept)

` Indicator of industry health

` Avoids over-production and under-production

USES OF INCOME ELASTICITY IN

BUSINESS DECISIONS


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` Knowledge of income elasticity of demand for

different products helps the firms to predict theeffect of a business cycle on sales. All countries

experience a business cycle where actual GDP

moves up and down in a regular pattern causing

booms and slowdowns orperhaps a recession.(The business cycle means incomes rise

and fall.)


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..THANK

YOU..

Presented by...

AjayPrasantPunithSaranya

Savita

income elasticity new

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