# Advantages of income elasticity of demand. The Importance of Income Elasticity in Decision Making 2019-01-09

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## The Advantages of the Elasticity of Demand

In other words, an inverse relationship exists between demand and income, and the income elasticity of demand is negative. A Practical application of price elasticity of demand : 1. The midpoint formula for calculating the income elasticity is very similar to. Incidence of Taxation: Incidence of tax lies on the person who ultimately pays the tax. Companies may divide users up into different income groups, then determine how their incomes impact their purchases.

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## Income Elasticity of Demand

That is, if the quantity demanded for a commodity increases with the rise in income of the consumer and vice versa, it is said to be positive income elasticity of demand. The terms of trade would be favourable in case of those countries, whose exports are of the nature of more elastic demand. Income levels increase with economic growth and decrease with economic decline. The price of each is then fixed by its elastic and inelastic demand. If it is infinite, they are perfect substitute. The goods whose income elasticity is positive for all level of income are termed as normal goods. If the cross elasticity is high there is imperfect market.

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## Explaining Income Elasticity of Demand

$advantages of income elasticity of demand$

Businesses typically evaluate income elasticity of demand for their products to help predict the impact of a on product sales. In this case, a rise in income will lead to a rise in demand. They can then compute which price point elicits the greatest profit margin. Long- term production planning and management depend more on the income elasticity because management can know the effect of changing income levels on the demand for his product. In the Sphere of International Trade: It is of greater significance in the sphere of international trade. If the income elasticity of demand is negative, then the commodity is an inferior good.

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## Income elasticity of demand

For example, consumers may opt to use public transport instead of driving when oil prices rise as a result of inflation. Typically inferior goods or services exist where superior goods are available if the consumer has the money to be able to buy it. It helps in determining the foreign exchange rates: The rate of foreign exchange between the counties is also governed by the pattern of. Income elasticity shows fluctuations in demand for goods or services as precipitated by changes in the purchasing power of consumers. Elasticity of demand in Public Finance Elasticity of demand is of immense use to Finance Ministers to formulate taxation and economic policies. Like the I Phone or chewing gum.

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## Role and Significance of Elasticity of Demand

This usually happens in the maturity or decline stages of the product life cycle. This indicates the good is not a necessity like food, and would be considered a relative luxury for this individual. People are more cautious in what they spend when there's more at stake. In the Determination of Prices of Joint Products and Other. They are switching to low cost option i.

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## Important Uses of Income Elasticity of Demand

They also may conduct marketing research surveys to support their calculations, asking customers their preferred price ranges. In Price Discrimination by Monopolist 4. During depression period, demand for such goods decrease rapidly and sellers are adversely affected. Whereas if quantity demanded is relatively unresponsive to a change in price the product is said to be 'inelastic'. Acceptable price ranges may be high, but that may not necessarily create more sales. But to keep things positive, we'll always take the absolute value.

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## What is the importance of income elasticity of demand?

Therefore, the price of each is fixed on the basis of its elasticity of demand. Knowledge of income elasticity of demand helps firms predict the effect of an economic cycle on sales. This means that higher demand for bus tickets would have been occasioned by falling income levels among consumers. As an example, rice and potatoes are inferior goods. So, while calculating terms of trade, the intensities of demand of the two countries requiring the product of the other country should be considered.

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## Economics: Uses or Importance of Cross Elasticity of Demand

It provides information on the direction of change of demand, given a change in income and the size of the change. That is, if the quantity demanded for a commodity decreases with the rise in income of the consumer and vice versa, it is said to be negative income elasticity of demand. Determination of Price of Public Utilities: This concept is significant in the determination of the prices of public utility services. A small company may also need to find new uses for their products to attract customers with more disposable income. In framing economic policies, the knowledge of elasticity of demand is required. Therefore, company marketers can test various pricing scenarios, setting prices low, near the competitive average or higher.

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