Income Elasticity of Demand
Income elasticity of demand may be defined as the ratio or proportionate change in the quantity demanded of a commodity to a given proportionate change in the income. In short, it indicates the extent to which demand changes with a variation in consumer’s income. Practical application of income elasticity of demand

1. Helps in determining the rate of growth of the firm.
If the growth rate of the economy and income growth of the people is reasonably forecasted, in that case it is possible to predict expected increase in the sales of a firm and vice-versa. 2. Helps in the demand forecasting of a firm.

It can be used in estimating future demand provided the rate of increase in income and Ey for the products are known. Thus, it helps in demand forecasting activities of a firm. 3. Helps in production planning and marketing

The knowledge of Ey is essential for production planning, formulating marketing strategy, deciding advertising expenditure and nature of distribution channel etc in the long run. 4. Helps in ensuring stability in production

Proper estimation of different degrees of income elasticity of demand for different types of products helps in avoiding over-production or under production of a firm. One should also know whether rise or fall in income is permanent or temporary. 5. Helps in estimating construction of houses

The rate of growth in incomes of the people also helps in housing programs in a country. Thus, it helps a lot in managerial decisions of a firm.

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Explain the concept of elasticity of demand
In the real world, prices of different products vary day by day, however, the effect it has on the demand is a concept that is very important to understand. When a consumer has an ability or willingness to buy a certain number of products at a given price, it is known as demand. Elasticity of demand is the measure of change in quantity demanded of a product when there is change in factors that effect demand. There are 3 main types of elasticity of demand; Price elasticity demand, Incomeelasticity of demand and Cross elasticity of demand. This is a concept applied in many markets and it helps many external beneficiaries whether or not to increase price on a certain product. This text will help explain the 3 types of elasticity of demand in depth and provide examples.
The first type of elasticity of demand is PED, which stands for price elasticity of demand. It is the measure of change in quantity demanded when there is a change in price. When the quantity demanded of a product changes greatly compared to the change in price, this is known as an elastic demand. This is because there is a proportionately greater change in the quantity demanded than the price, hence in the formula for PED = % change in Qd / % change in Price, when PED > 1, it is an elastic product. For example, if a...

...Title: Distinguish between price elasticity of demand, cross elasticity of demand and incomeelasticity of demand. What actions might be taken by countries and companies to reduce or limit price fluctuations?
Class: Business J
Student: Ibrokhim Parviz
Student ID: 99592
Tutor name: Sally
Word account:
Introduction:
Nowadays in modern developed market change in prices and other factors are very expected. The change in one of the factors for instance price and effect of it on another factor like demand or supply are measured by elasticity. Elasticity is the measure of how the change in one of the factor will be affected on the other factors. Elasticity measures extent to which demand will change. Measure easily can be calculated in percentage (Anderton 2008). After a calculation of elasticity, it’s divided into three types which are classified by values of elasticity: perfectly elastic-infinity; elastic - if value is greater than one; perfectly inelastic- equals zero; inelastic - if the value of elasticity less than one; unitary elasticity - if the value is exactly one (Anderton 2008). There are four basic types of elasticity measure: Price elasticity of demand; Incomeelasticity of demand; Cross elasticity of demand and Price...

...IncomeElasticity of Demand
IncomeElasticity of Demand is a measure of responsiveness of demand to the changes in income and it involves demand curve shifts. It provides information on the direction of change of demand, given a change in income and the size of the change.
Formula for YED:
Percentage change in quantity demanded = %ΔQ
Percentage change in income %ΔY
Normal goods have a positive value of YED, while Inferior goods have a negative value of YED as shown in the graph below:
Normal goods: when income increases, demand for normal goods increases as well. An increase in income leads to an increase in consumption, demand shifts to the right
Inferior goods: when income increases, demand for this good falls. The demand curve shifts left as income rises. As income rises, the proportion spent on food tends to fall while the proportion spent on services tends to rise.
Necessity and Luxury goods
Necessity
YED 1 If a good has a YED that is greater than one, is has income elastic demand: a percentage increase in income produces a larger percentage increase in quantity demanded. Luxuries are income elastic goods. Like the I Phone or chewing gum.
Applications of Income and elasticity of demand...

...Explain what is meant by the terms price elasticity, incomeelasticity and cross elasticity of demand and discuss the main determinants of each of these. Discuss the importance of each of these to the decision making process within a typical business.
Elasticity is the responsiveness to which one variable responds to a change in another variable Price elasticity of demand (PED) measures the responsiveness of quantity demanded of a product to a change in its price. If a relatively small change in price leads to a relatively large change in demand, the product is said to be 'elastic'.
Whereas if quantity demanded is relatively unresponsive to a change in price the product is said to be 'inelastic'.
Price elasticity of demand can be given a numerical value which is just a number and not in terms of any particular unit. The resulting numerical figure will always be a negative number due to the inverse relationship between price and quantity demanded, but can be ignored. This numerical figure can be calculated by:Price elasticity of demand = percentage change in quantity demanded Percentage change in price For example if the price of a product rises from £20 to £24, which is a 20%change and demand falls from 400 units to 300 units, which is a 25% change, the calculation will be:25% = -1.2520%When the percentage change in price leads to a smaller percentage change...

...1. If an increase in income results in an increase in the demand for chicken, then chicken is a/ an ___________________________.
A. neutral good
B. luxury good
C. normal good
D. inferior good
2. Two goods are complements if the ____________________.
A. cross elasticity of demand is negative
B. incomeelasticity of demand is negative
C. cross elasticity of demand is positive
D.incomeelasticity of demand is positive
3. If a 5% decrease in the price of AAA brings about a 3% increase in the sales of BBB, then _______________________.
A. the cross elasticity of demand between AAA and BBB is positive
B. AAA and BBB are complementary goods
C. the price elasticity of demand for both AAA and BBB is inelastic
D. AAA and BBB are substitute goods
4. If Ahmad’s salary went up from RM1,200 to RM1,500, while his monthly demand for cigarettes increased from 10 packets to 12 packets, then Ahmad’s incomeelasticity of demand for cigarettes is considered to be ___________________________________________.
A. elastic
B. inelastic
C. unit elastic
D. indeterminate
5. Cross elasticity of demand measures the responsiveness of changes in the quantity __________ of one good to changes in __________.
A. supplied; the price of the same good...

...Q 1. Discuss the practical application of Price elasticity and Incomeelasticity of demand.
Ans: There are many practical applications of price elasticity and Incomeelasticity of demand which are discussed as below.
(A) Practical application of price elasticity of demand :
1. Production planning: It helps a producer to decide about the volume of production. When the demand is elastic, a producer has to produce different quantity of product and fixed quantity when the demand is inelastic.
2. It helps in fixing the prices of different goods: When the demand is elastic, the producer will change the price of the product according to change of demand and will approach the price decrease policy. Similarly when the price is in-elastic the producer will keep the price of the product fixed and will approach price-increase police.
Similarly it helps a monopolist to practise price discrimination on the basis of elasticity of demand.
3. It helps in fixing the rewards for factor inputs: The producer determines the rewards for factor inputs of the product according to the elasticity nature of the demand. Producer pays higher rewards for inelastic demand of any factor unit and lower rewards for elastic demand.
4. It helps in determining the foreign exchange rates: The rate of foreign exchange between the counties is also governed by the pattern of...

...MBA 502 – Elasticity & Demand
Price: Clearly one of the most important decisions for the firm
How will consumers react to a price change?
Buy less as price increases, but how much less?
How does a price change affect revenues?
Consumer adjustment to a change in price:
Law of demand – price and quantity are inversely related…what happens when price changes?
Substitution effect: Buy more (less) of a good when price falls (rises) relative to price of other goodIncome effect: Can buy more (less) of all goods when price falls (rises)
Increases real income
Price Elasticity of Demand
Indicates how responsive consumers are to variation in price
When price increases, buy more…but how much more?
Percent change in quantity divided by percent change in price
Similar to miles per hour (100 mi in 2 hours…50 mph)
# is how much more (less) you buy when price falls (rises) $1
NOT slope!
Take absolute value because it is almost always negative
Examples: % ∆ Q = -40%, % ∆ P = 25%....ε = 1.6
% ∆ Q = 5%, % ∆ P = 25%....ε = 0.2
Elasticity: Comparing the % ∆ Q to the % ∆ P…for a 1% price change, how much does quantity demanded change?
Relatively elastic: ε > 1 - quantity demanded changes more than price
Relatively inelastic: ε < 1 - quantity demanded changes less than price
Unit Elastic: ε = 1 - quantity demanded changes exactly as price
Perfectly elastic: ε = infinity - quantity...

...1a)
Price elasticity of demand (PED) measures the degree of responsiveness of the quantity demanded of a good to a given change in price of the good itself, ceteris paribus. It is found by taking the percentage change in quantity demanded of good X divided by the percentage change in the price of good X.
The numerical value of the price elasticity of demand is always negative due to the inverse relationship between quantity demanded and price as stated in the law of demand. When we interpret the value of the price elasticity of demand, we just quote the absolute value. The absolute value of PED range from zero to infinity.
When PED is greater than one, the demand for the good is said to be price elastic. It means that a proportionate change in price causes a more than proportionate change in quantity demanded, ceteris paribus.
When PED is less than one, demand for the good is said to be price inelastic. This means that a proportionate change in price of the good causes a less than proportionate change in quantity demanded, ceteris paribus.
Different products have different price elastic ties due to a number of factors. Firstly the availability and closeness of substitutes. The more easily available and closer the substitutes for the good, the more price elastic will be the demand for the good. The availability of substitutes can be affected by the definition of market and the time span under consideration.
The...