INCOME ELASTICITY OF DEMAND

“It is the degree of responsiveness of demand for goods to a change in income”. It is the extent to which demand changes as a result of increase or decrease in income. Additional income is mostly spent on luxurious or semi-luxurious items, and not very much on goods of necessity like garri, fish, yam, etc. Thus the demand on necessity is income inelastic, while the demand on luxurious items is income elastic.

Income elasticity is similar to income effect: the change in quantity demanded is as a result of change in income while relative prices are held constant. However, in income elasticity the focus is on the extent to which demand changes due to a change in income while prices are either constant or fluctuating.

 

Types of Income Elasticity

They include the following:

1) Income Elastic

“A demand for a product is income elastic if a small change in income causes more the proportionate change in its quantity demanded”. This mostly occurs in superior goods like chicken. As income increases, consumers demand more of superior goods and less of inferior items. Thus superior goods are income elastic. The graphical illustration is shown in figure 6.

cropped1233406528814279896

 

2) Income inelastic

“The demand for a commodity is income inelastic, if a certain change in income leads to less than a proportionate change in its quantity demanded”. This mostly occurs with inferior goods. As income rises consumers tend to buy less of inferior goods and more of superior goods. Thus inferior goods are income inelastic as illustrated graphically in figure 7.

 

3) Unit-income elasticity

“The demand for a product is unit-income elastic if a certain percentage change in income yields (gives) equal percentage change in quantity demanded”. This mostly occurs with semi-luxurious goods like beverage, powdered milk (sachets), groundnut oil, etc. The graphical illustration is shown in figure 8.

 

cropped2467520488185216171

 

4) Zero Income Elasticity

“A product, has zero-income elasticity if increase in income does not make its demand to change”. That is, the demand remains constant (unchanged) as income increases. This, at times, occurs with certain normal goods, like fish and garri (especially with illiterate people), yam, ingredient (vegetable and palm. oil), bread. etc. The graphical illustration is shown in figure 9.

 

5) Positive Income Elasticity

“A product has positive income elasticity if increase in income leads to an increase in its demand. That is, a rise in income causes a rise in its demand. Thus income elasticity of demand for superior items (like chicken, milk, rice, beef, etc) is positive. Why. It is because demand and income move in the same direction. This is illustrated graphically in figure 10.

cropped362955372920876198

 

6) Negative income elasticity

A product has negative income elasticity if increase in income causes a fall in its demand. Thus income elasticity of demand for inferior goods (black plantain, cocoyam, tapioca, sweet potatoes, ice fish, etc) is negative. Why, It is because income and demand move in the opposite direction. The graphical illustration is shown in figure 11.

cropped7799374240650718810

 

Note;

Low and high income elasticity

Low income elasticity refers to income inelastic; while high income elasticity refers to income elastic.

 

Measuring income elasticity

Income elasticity may also be defined as

“A percentage change in quantity demanded divided by percentage change in income’.

And we can apply this definition in measuring income elasticity as follows:

Income elasticity is abbreviated as “Ey’

cropped5028171241510285144

 

Example

A teacher on a monthly salary of N3,000 buys half kilo of beef weekly. Consequent upon (as a result of ) his salary increase to N4,500, the quantity of beef demanded rise to 1 1/2 (one and half) kilo weekly. Calculate his income elasticity, and determine the type of income elasticity that faces him.

Let us adopt the tabular approach in finding solution (answer) to the above question. This is shown in the table below.

cropped7354461802877776220

cropped6829929960907268144

cropped295844460518801306

cropped1542718931150750818

cropped8075493401307234996

X = 4 and Y = income elastic; it is because income elasticity is greater than one (E> 1).

Leave a Reply

Your email address will not be published. Required fields are marked *