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Income Elasticity of Demand, Economics Video Lecture | Business Economics for CA Foundation
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FAQs on Income Elasticity of Demand, Economics Video Lecture - Business Economics for CA Foundation
| 1. What is income elasticity of demand? |  |
Ans. Income elasticity of demand measures the responsiveness of the quantity demanded of a good or service to a change in income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. A positive income elasticity indicates a normal good, where demand increases as income increases, while a negative income elasticity indicates an inferior good, where demand decreases as income increases.
| 2. How is income elasticity of demand calculated? | |
Ans. Income elasticity of demand is calculated using the following formula:
Income Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Income)
For example, if the quantity demanded of a good increases by 10% when income increases by 5%, the income elasticity of demand would be 10% / 5% = 2.
| 3. What does a positive income elasticity of demand indicate? | |
Ans. A positive income elasticity of demand indicates that the good is a normal good. This means that as income increases, the quantity demanded of the good also increases. Normal goods have income elasticities greater than zero but less than one, indicating that the demand for these goods is income-elastic but not excessively so.
| 4. What does a negative income elasticity of demand indicate? | |
Ans. A negative income elasticity of demand indicates that the good is an inferior good. This means that as income increases, the quantity demanded of the good decreases. Inferior goods have income elasticities less than zero, indicating a decrease in demand as income rises. Examples of inferior goods include low-quality or generic products that consumers switch to when their income decreases.
| 5. How does income elasticity of demand affect pricing and marketing strategies? | |
Ans. Income elasticity of demand provides valuable information for businesses in determining pricing and marketing strategies. For normal goods with a positive income elasticity, businesses can expect an increase in demand as income rises. This may lead to opportunities for price increases to maximize profits. However, for inferior goods with a negative income elasticity, businesses may need to consider lowering prices or implementing marketing strategies to attract buyers with lower incomes. Understanding income elasticity of demand helps businesses adapt their strategies to effectively target different market segments based on their income levels.
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Dec 22, 2024 Last updated |
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