Share on Facebook Income elasticity shows fluctuations in demand for goods or services as precipitated by changes in the purchasing power of consumers. Consumers adjust their spending habits along with changes in their disposable income.
Uses or Importance of Income Elasticity of Demand Some important uses of income elasticity of demand are as follows: Useful to know about stage of trade cycle: Income elasticity of demand for necessary goods is low.
Therefore, during prosperity, the sellers of such goods will not be benefited much and during depression, they are not affected much. During prosperity, income of the consumer increase and hence, they are capable of affording goods that are more luxurious.
The sellers of such goods are benefited. During depression period, demand for such goods decrease rapidly and sellers are adversely affected.
Useful for forecasting demand: The concept of income elasticity of demand can be used for forecasting demand for a product over a period. Therefore, it helps in estimating the required production level of different commodities at a certain point of time in the future.
This knowledge is also important for economic planning. The concept of income elasticity of demand can also be used to define the normal and inferior goods.
The goods whose income elasticity is positive for all level of income are termed as normal goods.
On the other hand, the goods for whose income elasticity is negative beyond a certain level of income are termed as inferior goods.
Useful for making marketing strategy: Concept of income elasticity of demand can be useful in making marketing strategy. For example, firm producing luxury items should concentrate its marketing efforts on media that reach the high-income group of the people. Some important uses of income elasticity of demand are as follows:Marginal Revenue and Elasticity As derived in the textbook (equation on page ) the relationship between price elasticity of demand (ε) and marginal revenue is.
Explain the practical implication of various elasticity of demand. Price Elasticity of Demand and Its Implications for Business and Government by Prit in Economics, April 8, Price elasticity of demand and the factors determining the price elasticity of demand for a product or service.
Elasticity is a measure of how much the quantity demanded of a service/good changes in relation to its price, income or supply. How it works (Example): If the quantity demanded changes a lot when prices change a little, a product is said to be elastic. 14 Chapter 10 Price Elasticity of Demand & Supply I.
Factors affecting price elasticity of demand Proportion of income spent The greater the proportion of income spent on a good, the higher its price elasticity of.
Practical application of income elasticity of demand 1. Helps in determining the rate of growth of the firm. If the growth rate of the economy and income growth of the people is reasonably forecasted, in that case it is possible to predict expected increase in the sales of a firm and vice-versa.
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