Answer to Question #27198 in Microeconomics for Dicson

Question

Mensy Ltd produce two goods that have income elasticity values as follows - Good A= -0.5 and Good B= 4.
Explain the income elasticity of demand for Good A and Good B.

Answer 1

In economics, income elasticity of demand measures the responsiveness of the demand for a good to a change in the income of the people demanding the good, ceteris paribus. It is calculated as the ratio of the percentage change in demand to the percentage change in income.
• A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the demand and may lead to changes to more luxurious substitutes.
• A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in demand. If income elasticity of demand of a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good.
• A zero income elasticity (or inelastic) demand occurs when an increase in income is not associated with a change in the demand of a good. These would be sticky goods.
So, good A is inferior good, and good B is normal good. If the income rises, the demand for good A will fall and demand for good B will rise.