Importance of income elasticity to firms

Topics: Consumer theory, Supply and demand, Price elasticity of demand Pages: 3 (954 words) Published: September 24, 2013
In any economy, the levels of incomes of the population determine the level of demand of commodities produced and made available in that economy. The higher the income, the higher the demand of commodities and vice- versa when there is low incomes. Income elasticity is when income affects demand. This happens when income is increased in which certain goods such as inferior goods, the demand decreases. As for normal goods, the quantity demanded increases when income increases which in this case is regarded as “positive income elasticity.” Conversely, the quantity demanded for inferior goods decreases when income increases and this is referred to as “negative income elasticity.” Meanwhile, there are some normal goods which are taken as necessities which will have small income elasticity because these goods are necessary to our lives and people still need them though the income might be low (Mike, 2013, 19:10). The income elasticity is very important to firms in that it helps them to determine the kind of goods to produce at a particular time following the rooming income. Consequently, prices of goods will too, be determined in proportion to demand of such goods which is equally determined by the levels of income. It also allows firms to know the kind of employees to keep in employment as some firms look at rates of income of employees, for instance, long serving employees would attract higher income rates which some companies would be against. This publication will explain the importance of income elasticity to firms.

Mike (2013: 19:10), asserts that the “Income Elasticity of Demand” measures the rate of response of quantity demand due to a raise (or lowering) in a consumers income. This implies that the responsiveness of the demand for particular goods to a change in the income of the people demanding the goods, ceteris paribus. It is calculated as the ratio of the percentage change in...
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