With this knowledge, businesses can strategize how to respond to customer financials, both for their own stability and also, in how they offer their products. The ratio is the quantity of demand/changes to income.īusinesses use income elasticity of demand to forecast economic growth and potential loss according to market demographics-like the geographic location-and economic shifts. Income elasticity of demand is how much market demand changes according to changes in customer income. The formula for calculating income elasticity of demand is % of the change in quantity purchased (from one time period to another, typically year over year) divided by % of the change in income. Income elasticity of demand refers to how the demand for goods relates to changes in consumer income.īusinesses use income elasticity of demand to predict and plan for potential changes in pricing, budgeting and production. In this article, we discuss what income elasticity is, how it works, types of income elasticity of demand, how to calculate it and how to interpret the results of the calculations. Therefore, companies need to be aware of economic factors and consumer behaviors to know how and when to sell their products and how much to charge for them. A consumer’s income can often determine what they buy.
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