The income elasticity of demand , Microeconomics

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The income elasticity of demand calculates the responsiveness of the quantity demanded of a commodity to changes in consumers' incomes.  This is typically calculated by replacing the price variable with income (economists use the letter Y to denote income) in the midpoints formula.  Again, in business planning the responsiveness of consumers to changes in their income may be very significant.  Housing and automobiles, as well as, various big ticket luxury items have demand thatis sensitive to changes in income.  The income elasticity formula is presented below.

 

    Ed  =   Change in Qty      ÷        Change in income  

                (Q1 + Q2)/2                     (Y1 + Y2)/2

 


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