Q.What is income elasticity of demand? Or As the price of a commodity decreases from Rs. 8 to Rs. 4, the quantity demanded increases from 10 kg to 15 kg respectively. What is the magnitude of price elasticity of demand?
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Start your 14-day free trial to unlock the full solution →Income elasticity of demand is the ratio of percentage change in demand to percentage change in income; in the numerical, price elasticity of demand comes out to exactly 1 in magnitude.
Income elasticity of demand. It measures the degree of responsiveness of quantity demanded of a commodity to a change in the consumer's money income, holding price and other factors constant.
Ey = (percentage change in quantity demanded) / (percentage change in income)
Its sign also tells us the nature of the good: positive for normal goods (demand rises with income), negative for inferior goods (demand falls as income rises), and especially high positive values for luxuries.
Or — price elasticity numerical.
| Item | Initial | Final | Change |
|---|---|---|---|
| Price | Rs. 8 | Rs. 4 | fall of Rs. 4 |
| Quantity | 10 kg | 15 kg | rise of 5 kg |
Percentage change in quantity demanded = 5/10 × 100 = 50%
Percentage change in price = 4/8 × 100 = 50% (fall)
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