In other words, zero income elasticity signifies that quantity demanded of the good is quite unresponsive to changes in income.īesides, zero income elasticity is significant because it represents a dividing line between positive income elasticity on the one side and negative income elasticity on the other. Zero income elasticity of demand for a good implies that a given increase in income does not at all lead to any increase in quantity demanded of the good or increase in expenditure on it. It is important to note that the value of zero income elasticity of demand is of great significance. ![]() Let E stand for the expenditure made on the good. P is the change in expenditure made as a result of change in income. Now,as explained above, Q.P is the expenditure made on the good and ∆ Q. Multiplying the numerator and denominator by P, we get If Q is the quantity purchased of the good and P the price of the good, the expenditure made on the good will be equal to QP. It should be noted that expenditure is equal to the quantity purchased of the good multiplied by the price of the good. We can also express the income elasticity in terms of changes in expenditure made on the good rather than the change in quantity purchased of the good as a result of a change in income. Income Elasticity Defined in Terms of Expenditure: But in economic theory it is useful to call the goods with income elasticity greater than one as luxuries and goods with income elasticity less than one as necessities. It should, however, be noted that the definitions of luxuries and necessities on the basis of income elasticity may not conform to their definitions in English dictionary because the dictionary’s luxuries may be necessities and its necessities may be luxuries according to the above definition. A good with an income elasticity less than one and which claims declining proportion of consumer’s income as he becomes richer is called a necessity. On the other hand, if income elasticity for a good is less than one, the proportion of consumer’s income spent on it falls as his income rises, that is, the good becomes relatively less important in consumer’s expenditure as his income rises.Ī good having income elasticity more than one and which therefore bulks larger in consumer’s budget as he becomes richer is called a luxury. If the income elasticity for a good is greater than one, the proportion of consumer’s income spent on the good rises as consumer’s income increases, that is, that good bulks larger in consumer’s expenditure as he becomes richer. Income elasticity of unity also represents a useful dividing line. This is because when income elasticity of demand for a good is equal to one, then proportion of income spent on the good remains the same as consumer’s income increases. Income Elasticity, Luxuries and Necessities:Īnother significant value of income elasticity is unity. We thus see that zero income elasticity is a significant value, tor it represents a dividing line between positive income elasticity and negative income elasticity and therefore helps us in distinguishing normal goods from inferior goods. Goods having negative income elasticity are known as inferior goods. On the other side there are all those goods which have income elasticity less than zero (that is, negative) and in such cases increase in income leads to the fall in quantity demanded of the goods. ![]() When income elasticity is more than zero (that is, positive), then an increase in income leads to the increase in quantity demanded of the goods. In other words, zero income elasticity signifies that quantity demanded o the good is quite unresponsive to changes in income.īesides, zero income elasticity is significant because it represents a dividing line between positive income elasticity on the one side and negative income elasticity on the other. ![]() Income Elasticity, Normal Goods and Inferior Goods: Midpoint formula for measuring income elasticity of demand when changes in income are quite large can be written as: Let M stand for an initial income, AM for a small change in income, Q for the initial quantity purchased demand, AQ for a change in quantity purchased as a result of a change in income and e,- for income elasticity of demand. For example, if a 2 per cent change in income leads to 5 per cent change in quantity demanded of a good, income elasticity of the demand for the good will be 5%/2%=2.5. Thus if the proportionate change in purchases or quantity demanded of a good exceeds that of proportionate change in income, income elasticity will be greater than one.
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