The curve Dy in Panel C shows unitary income elasticity of demand. The increase in quantity demanded Q 1 Q 2 exactly equals the increase in income Y 1 Y 2. The coefficient of income elasticity of demand in the case of inferior goods is negative. In the case of an inferior good, the consumer will reduce his purchases of it, when his income increases.
Panel E shows a vertical income demand curve D y with zero elasticity. Each D v curve expresses the income-quantity relationship. Such a curve is known as Engel curve which shows the quantities of a commodity which a consumer would buy at various levels of income. Income elasticity in terms of non-linear Engel curves can be measured with the point formula.
The coefficient of income elasticity of demand at point A is. This shows that the curve E 1 is income elastic over much of its range. This shows that the income elasticity of E 1 , curve over much of its range is larger than zero bur smaller than 1. In the backward-sloping range, draw a tangent GC at point C.
This shows that over the range the Engel curve E 3 is negatively sloped, E y is negative and the commodity is an inferior good. Whereas, if the product has several uses, such as raw material coal, iron, steel, etc. Thus, the demand for such products is said to be elastic. Whether the Demand can be Postponed or not: If the demand for a particular product cannot be postponed then, the demand is said to be inelastic.
Such as, Wheat is required in daily life and hence its demand cannot be postponed. On the other hand, the items whose demand can be postponed is said to have elastic demand. Such as the demand for the furniture can be postponed until the time its prices fall.
The substitutes are the goods which can be used in place of one another. The goods which have close substitutes are said to have elastic demand. Such as, tea and coffee are close substitutes and if the price of tea increases, then people will switch to the coffee and demand for the tea will decrease significantly. Whereas, if there are no close substitutes for a product, then its demand is said to be inelastic. Such as salt and sugar do not have their close substitutes and hence lower is their price elasticity.
The elasticity of demand also depends on the complementary goods, the goods which are used jointly. If for a commodity close substitutes are available, its demand tends to be elastic.
If the price of such a commodity goes up, the people will shift to its close substitutes and as a result the demand for that commodity will greatly decline. If for a commodity substitutes are not available, people will have to buy it even when its price rises, and therefore its demand would tend to be inelastic. For instance, if the prices of Campa Cola were to increase sharply, many consumers would turn to other kinds of cold drinks, and as a result, the quantity demanded of Campa Cola will decline very much.
On the other hand, if the price of Campa Cola falls, many consumers will change from other cold drinks to Campa Cola. Thus, the demand for Campa Cola is elastic. It is the availability of close substitutes that makes the consumers sensitive to the changes in the price of Campa Cola and this makes the demand for Campa Cola elastic.
Likewise, demand for common salt is inelastic because good substitutes for common salt are not available. If the price of common salt rises slightly, the people would consume almost the same quantity of salt as before since good substitutes are not available. The demand for common salt is inelastic also because people spend a very little part of their income on it and even if its price rises it makes only negligible difference in their budget allocation for the salt.
The greater the proportion of income spent on a commodity, the greater will be generally its elasticity of demand, and vice versa. The demand for common salt, soap, matches and such other goods tends to be highly inelastic because the households spend only a fraction of their income on each of them.
On the other hand, demand for cloth in a country like India tends to be elastic since households spend a good part of their income on clothing. If the price of cloth falls, it will mean great saving in the budget of many households and therefore they will tend to increase the quantity demanded of the cloth. On the other hand, if the price of cloth rises many households will not afford to buy as much quantity of cloth as before, and therefore, the quantity demanded of cloth will fall.
Income elasticity of demand is high when the demand for a commodity rises more than proportionate to the increase in income. Assuming prices of all other goods as constant, if the income of the consumer increases by 5% and as a result his purchases of the commodity increase by 10%, then E = .
Determinants of Elasticity of Demand. Apart from the price, there are several other factors that influence the elasticity of demand. These are: Consumer Income: The income of the consumer also affects the elasticity of demand. For high-income groups, the demand is said to be less elastic as the rise or fall in the price will not have much effect on the demand for a product.
Price elasticity of demand has four determinants: product necessity, how many substitutes for the product there are, how large a percentage of income the product costs, and how frequently its purchased, according to Economics Help. The price elasticity of demand (PED) is a measure that captures the responsiveness of a good’s quantity demanded to a change in its price. More specifically, it is the percentage change in quantity demanded in response to a one percent change in price when all other determinants of demand .
Let's look more closely at each of the determinants of demand. Price. Price, in many cases, is likely to be the most fundamental determinant of demand since it is often the first thing that people think about when deciding how much of an item to buy. Calculating the Income Elasticity of Demand. Economics Lesson: The Demand Curve Explained. The 5 determinants of demand are price, income, prices of related goods, tastes, and expectations. A 6th, for aggregate demand, is number of buyers.