In: Economics
If a person’s income changes from $650/week to $720/week. If his demand for a product changes from 84 units to 78 units
Income | Demand |
I1 = 650 | Q1=84 |
I2 = 720 | Q2 = 78 |
Mid point method of income elasticity:
=> Income elasticity = [(Q2 - Q1) / (Q2+Q1)/2] ÷ [(I2 - I1) / (I2 + I1)/2]
=> Income elasticity = [(78 - 84) / (78 +84)/2] ÷ [(720 - 650) / (720 + 650) / 2]
=> Income elasticity = [(-6) / (162 /2) ] ÷ [(70) / (1370 /2)]
=> Income elasticity = [-6 / 81] ÷ [ 70 / 685]
=> Income elasticity = [-6 /81] * [685 / 70]
=> income elasticity = -0.72
Income elasticity of demand is -0.72.
The negative value of income elasticity of demand suggests that the good is inferior.