Income Elasticity Less Than Zero

In case of basic necessary goods such as salt kerosene electricity etc.

Income elasticity less than zero. Income elasticity of product y 2 10 0 5. On the other side there are all those goods which have income elasticity less than zero that is negative and in such cases increase in income leads to the fall in quantity demanded of the goods. Demand rises more than proportionate to a change in income for example a 8 increase in income might lead to a 10 rise in the demand for new kitchens. If the quantity demanded for a commodity remains constant with any rise or fall in income of the consumer and it is said to be zero income elasticity of demand.

It s called an inferior good because an income elasticity less than 0 means that when your income increases you demand less of the good. Normal necessities have a positive but low income elasticity compared to luxurious goods. The percentage change in quantity demanded divided by the percentage change in income complements any pair of goods where their cross price elasticity of demand is negative less than zero. Luxury goods and services have an income elasticity of demand 1 i e.

For example salt is demanded in same quantity by a high income and a low income individual. This is because there is no effect of increase in consumer s income on the demand of product. If the elasticity of demand is greater than 1 it is a luxury good or a superior good. However normal goods can further be broken down into normal necessities and normal luxuries.

While going through the discussion you must have noticed some of the terms that are integral parts of the income elasticity concept and their naming are based upon the numerical value of income elasticity. Income elasticity of product x 25 10 2 5. Goods having negative income elasticity are known as inferior goods. There is zero income elasticity of demand.

The reason is you use the extra income to buy better but more expensive products that you prefer. The income elasticity of demand is zero e y 0 in case of essential goods. The income elasticity of demand in this example is 1 25. Normal goods whose income elasticity of demand is between zero and one are typically referred to as necessity goods which are products and services that consumers will buy regardless of changes.

A zero income elasticity of demand occurs when an increase in income is not associated with a change in the demand of a good. If income elasticity of demand of a commodity is less than 1 it is a necessity good. Demand is rising less than proportionately to income.