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Income Elasticity of Demand (Determinants (Nature of Goods (More basic in…
Income Elasticity of Demand
Inferior Goods
Negative YED
Increase in income cause demand curve to shift left
For The Businessman
National income fluctuates over time
Have to take into account the effect of income changes on the pattern of demand for their products
In forecasting future sales at any given price, producers have to include in their assessments of the predicted change in general level of income
Primary Product Producers
Low YED
Natural resource that has not been manufactured, obtained from forestry, fishing and mining
More important in developing countries
If economy is growing, and incomes are increasing, primary producers producing low YED goods experience small increases in their products
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If economy is regressing
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Secondary Product Producers
Relatively higher YED
If economy experiences growth, with incomes rising
Demand for luxury items increase more than demand for basic items (Depends on income)
Producers could plan for increased sales
When economy experience recessionary phase, fall in incomes
Decreased consumption of less essential products
Tertiary Product Producers
High YED
Services
Developed economies have large tertiary sectors, contributing the most to employment
Rising Income
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Decreasing Income (Recessionary Phase)
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Responsiveness of demand for a good to change in income, C.P.
Shift in demand curve in response to change in income
Normal Goods
Positive YED
Increase in income cause demand curve to shift right
Magnitude < 1
Income Inelastic
Necessities
Demand falls less than proportionally than income
Magnitude > 1
Income Elastic
Generally luxuries
Demand fall when income falls
% change in qty demanded/ % change in income
Determinants
Nature of Goods
More basic in the consumption pattern of households, lower YED
Level of Household's income
A good does not have to be in the same category at all levels of income
Income elasticities for any one good vary with level of household's income