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Income Elasticity and its types

Incomeelasticity

Income Elasticity of Demand:
The proportionate change in quantity demanded for a goods due to the proportionate change in consumer's income is called income elasticity of demand. Income elasticity is usually symbolized by 'Ey' and written as: 

Degree / Types of income elasticity of demand:

1) Positive Income Elasticity:

If increase in income leads to increase in demand of a commodity and decrease in income leads to decrease in demand of a commodity, it is called positive income elasticity. Positive income elasticity can be divided into  the following three types:

a. Income elasticity greater than unity: If the percentage change in quantity demanded for a commodity is greater than percentage change in income of the consumer, it is said to be income  elasticity greater than unity. 


In the given figure, quantity demanded and consumer’s income is measured along X-axis and Y-axis respectively. The small rise in income from OY to OY1 has caused greater rise in the quantity demanded from OQ to OQ1 and vice versa. Thus, the demand curve DD shows income elasticity greater than unity.

 


 

b. Income elasticity less than unity: If the percentage change in quantity demanded for a commodity is less than percentage change in income of the consumer, it is said to be income elasticity less than unity.



In the given figure, quantity demanded and consumer’s income is measured along X-axis and Y-axis respectively. The greater rise in income from OY to OY1 has caused small rise in the quantity demanded from OQ to OQ1 and vice versa. Thus, the demand curve DD shows income elasticity less than unity.



c. Income elasticity equal to unity: If the percentage change in quantity demanded for a commodity is equal to percentage change in income of the consumer, it is said to be income elasticity equal to unity.

In the given figure, quantity demanded and consumer’s income is measured along X-axis and Y-axis respectively. The small rise in income from OY to OY1 has caused equal rise in the quantity demanded from OQ to OQ1 and vice versa. Thus, the demand curve DD shows income elasticity equal to unity.




2. Zero Income Elasticity:
If the quantity demanded for a commodity remains constant with any rise or fall in income of the consumer and, it is said to be zero income elasticity of demand.

In the given figure, quantity demanded and consumer’s income is measured along X-axis and Y-axis respectively. The consumer’s income may fall to OY1 or rise to OY2 from OY, the quantity demanded remains the same at OQ. Thus, the demand curve DD, which is vertical straight line parallel to Y-axis shows zero income elasticity of demand.



3. Negative Income Elasticity:
If there is inverse relationship between income of the consumer and demand for the commodity, then income elasticity will be negative. That is, if the quantity demanded for a commodity decreases with the rise in income of the consumer and vice versa, it is said to be negative income elasticity of demand.

In the given figure, quantity demanded and consumer’s income is measured along X-axis and Y-axis respectively. When the consumer’s income rises from OY to OY1 the quantity demanded of inferior goods falls from OQ to OQ1 and vice versa. Thus, the demand curve DD shows negative income elasticity of demand.