Due to increase in the Income of the consumer the demand for Good X falls.
State and explain the Nature of Good X along with diagram
Answers
Consider a local car dealership that gathers data on changes in demand and consumer income for its cars for a particular year. When the average real income of its customers falls from $50,000 to $40,000, the demand for its cars plummets from 10,000 to 5,000 units sold, all other things unchanged.
The income elasticity of demand is calculated by taking a negative 50% change in demand, a drop of 5,000 divided by the initial demand of 10,000 cars, and dividing it by a 20% change in real income—the $10,000 change in income divided by the initial value of $50,000. This produces an elasticity of 2.5, which indicates local customers are particularly sensitive to changes in their income when it comes to buying cars.
Types of Income Elasticity of Demand
There are five types of income elasticity of demand:
High: A rise in income comes with bigger increases in the quantity demanded.
Unitary: The rise in income is proportionate to the increase in the quantity demanded.
Low: A jump in income is less than proportionate to the increase in the quantity demanded.
Zero: The quantity bought/demanded is the same even if income changes
Negative: An increase in income comes with a decrease in the quantity demanded.
Interpretation of Income Elasticity of Demand
Depending on the values of the income elasticity of demand, goods can be broadly categorized as inferior goods and normal goods. Normal goods have a positive income elasticity of demand; as incomes rise, more goods are demanded at each price level.