Importance of Income Elasticity

If a country is experiencing economic growth, the income of the people will increase.  However, for those engaged in the production of goods with negative income elasticities, this will mean a declining demand for their product.  Even products with positive income elasticities, there is a great variability of response.

Income elasticity therefore has a most important effect upon resource allocation.  As such, prosperous areas of any economy are often those associated with products which have a high income elasticity.  In recession the opposite will be true.