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What is Income Elasticity?
The term “Income elasticity” can be defined as the ratio of a change in percentage in the amount demanded to an income percentage, with all the other factors being constant. This is essential in distinguishing the market for any commodity based on the type of goods that customers are likely to buy more when their income amount increases.
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Why is it important?
Income elasticity is very useful in predicting changes in the demand for any commodity that is sold by a company in varied economic conditions. There will not be much fluctuation in the demand for any commodity in boom or recession periods due to low income elasticity. However, the demand for luxury items will rise sharply during a boom and nosedive in an equal manner at the time of recession.
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