Question

What will be the income elasticity of demand in case of normal goods?

Answer 1

Positive Income Elasticity: A positive income elasticity of demand for a good is one in which the quantity of the good purchased rises as the consumer's income rises and falls as the consumer's income falls. Since an increase in income causes the amount desired of a commodity to rise, income elasticity of demand is positive for the majority of commodities. "Normal" products are those that have positive income elasticities. We can divide the income elasticity of demand for typical items into three groups:

1. Income elastic: The e_y will be greater than unity if the percentage change in the amount required of a commodity is more than the percentage change in income. In this instance, the demand for the commodity is referred to as income elastic. Luxurious goods like jewelry, vehicles, and color TVs typically have high income elasticity of demand.
2. Income inelastic: The e_y will be less than unity if the percentage change in the amount required of a commodity is less than the percentage change in income. This situation is known as income inelastic demand for the commodity. Food, soap, and clothing are examples of necessities with low income elasticity of demand.
3. Unitary income elasticity: The e_y will equal unity if the percentage change in the amount demanded of a commodity is equal to the percentage change in income. The commodity in this instance has a unitary income elasticity. The boundary between income elastic and income inelastic demand is represented by income elasticity of consumption.