Income Elasticity of Demand

In: Business and Management

Submitted By AlmaPa
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Income is a factor that can help to determine how much or how many units a product or service can sell in a determined period of time. Thus, changes in income are important to be monitored, as well as understanding the kind of good we have. To do this, we use Income elasticity of demand (Ey) which measures the effect of a change in income in quantity demanded. The basic formula for calculating the coefficient of income elasticity is:
Percentage change in quantity demanded of a good divided by the percentage change in real consumers' income.
Depending in the result of this equation the good can be thought as a normal good when the result is > 0 (positive income elasticity), or an inferior good when the result is < 0 (negative income elasticity). Within the category of normal goods there is a distinction between necessities and luxuries. A luxury will have an Ey >1. To categorize income elasticity of demand we check to see if it is more, equal or less than 1. If it is more is elastic, if it is less is inelastic and if it is equal is unit elastic and quantity demanded changes by the same percentage as the price.
Normal goods
As income rise more is the demand. The house market in San Diego County is an example of a normal good that has turned for some into a luxury although housing is per se a need. In a recent article from Union Tribune San Diego was ranked as the second less affordable city to buy a house in the United States (Horn, 2014). Indeed, in other study the author says that the median income for households falls below what the market price requires by -25.90% (2012).
SAN FRANCISCO $679,800 $137,129.55
SAN DIEGO $483,000 $98,534.22
NEW YORK CITY $388,900 $89,799.69

Table 1. The least affordable cities1…...

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