What Is Income Elasticity of Demand?
Income elasticity of demand is a term used to describe the amount of influence a change in income will have on consumer demand for specified goods or services. The idea is to measure the impact that an increase or decrease in income will have on the buying habits of consumers. This type of assessment is very important to companies that produce goods and services that are not considered necessities, and often is considered when setting prices for those products. One of the assumptions that serves as the foundation for income elasticity of demand is that a shift in income level will cause a typical household to alter its purchasing habits. The general expectation when that income level is lowered for some reason is that the household will continue to purchase necessities, even though those items now consume a larger percentage of the available income. At the same time, a household that experiences a significant increase in income is likely to increase more products that are considered lu
