Chapter 12.2, Problem 1QS2

Summary Introduction

To Determine:

The sensitivity of demand for a product relative to changes in income is called what?

Introduction:

The sensitivity of demand for a product relative to changes in income is called INCOME ELASTICITY. Income elasticity is the quantity of a product demanded when the income of a consumer changes while other factors remain the same. As and when the income of any person changes, his needs and desires also change accordingly therefore, depending upon the increase or decrease of income the consumers will change their demand for the product.

$\text{Income elasticity = }\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in income}}$