ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Where the percentage change in demand is less than the percentage change in income.
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The responsiveness of demand to a change in income.
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Percentage change in demand for a product is proportionately greater than the percentage change in income.
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None of the above
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Detailed explanation-1: -Income elasticity of demand describes the sensitivity to changes in consumer income relative to the amount of a good that consumers demand. Highly elastic goods will see their quantity demanded change rapidly with income changes, while inelastic goods will see the same quantity demanded even as income changes.
Detailed explanation-2: -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-3: -What makes a product elastic? If a price change for a product causes a substantial change in either its supply or its demand, it is considered elastic. Generally, it means that there are acceptable substitutes for the product. Examples would be cookies, luxury automobiles, and coffee.
Detailed explanation-4: -If a good is income elastic, it means that Ey>1 E y > 1 in absolute terms. Therefore a small percentage change in income will cause a large percentage increase in the quantity demanded.
Detailed explanation-5: -If the income elasticity of demand is greater than 1, the good or service is considered a luxury and income elastic. A good or service that has an income elasticity of demand between zero and 1 is considered a normal good and income inelastic.