ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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It has close substitutes.
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It is a necessity.
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It is a normal good.
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It is an inferior good.
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Detailed explanation-1: -Inferior goods have a negative income elasticity of demand; as consumers’ income rises, they buy fewer inferior goods. A typical example of such a type of product is margarine, which is much cheaper than butter.
Detailed explanation-2: -So, for our example, since we found the elasticity of demand to be-0.39, that means that a 1% increase in the price level will lead to a 0.39% decrease in the quantity demanded.
Detailed explanation-3: -Having an income elasticity of demand less than 1 means that for each 1% increase in income, quantity demanded either increases by less than 1% or decreases. This is because income elasticity can be negative, and thus higher incomes could mean less demand.
Detailed explanation-4: -In economics, the demand for inferior goods decreases as income increases or the economy improves. When this happens, consumers will be more willing to spend on more costly substitutes. Some of the reasons behind this shift may include quality or a change to a consumer’s socio-economic status.