Generally, Income elasticity of demand is determined as the ratio of percentage (%) change in the quantity of the goods demanded to the percentage change in the consumer’s income level.
So, the higher IEoD in concrete terms of a particular item, the higher clients respond in their buying powers if their revenue changes. Businesses usually evaluate the income elasticity of demand for the goods to predict the effects of a particular professional cycle on the sales of goods. And a zero-income elasticity of demand for products means if income rises or falls, the need for things or services will not change.
Also, the online income elasticity of demand calculator determines the percentage change in the quantity demanded, percentage change in earnings, final and initial revenue.
Types of Income Elasticity of Demand:
Well, there are five types of income elasticity of demand:
- High IEoD: An increase in wages comes with relatively rises in the volume demanded.
- Unitary IEoD: The jump in wages is proportionate to the boost in the required quantity.
- Low IEoD: An increase in income is less than proportionate to the up in the amount demanded.
- Zero IEoD: The quantity demanded stands the same even if profit changes.
- Negative IEoD: The surge in income comes with a fall in quantity demanded.
These types of income elasticity of demand will be defined according to the price and quantity of the free income elasticity calculator.
Calculating the Income Elasticity of Demand:
Consider a local car dealership collecting data on consumer demand and car sales for the customers whose average actual income is less than sixty thousand USD during the year. When the price is more than forty thousands USD, the demand for the particular car dropped sharply from 10,000 to 50,000 and everything else remained the same. So, the change in revenue of 10,000 USD divided by initial cost of 50,000 USD. The elasticity is 2.5, indicating that local buyers are particularly sensitive to changes in their income when buying a car.
Different Stages for calculating income elasticity of demand
Critical stages of trade cycle:
The income elasticity of demand for essential things is low. That’s why, during prosperity, the vendor of such products will not be benefited much, and in the time of depression, they are not affected too much. During profitability, the client’s income rises, and hence, they can afford more expensive goods. The vendors of particular interests are benefited. During the depression period, demand for such products decreases rapidly, and vendors are adversely affected. Anyhow, you can know the different stages of the trade cycle with online income elasticity of demand calculator.
Assess the impact of changes in economic activity:
Income increases during the growth period, and luxury goods companies find that the demand for their products is growing faster than their income. During a recession, demand may drop rapidly. Income elasticity can help you manage your marketing efforts. If per capita income or household income is the main determinant of demand for a particular product, this may affect the location and type of outlets. This may affect advertising and other promotional activities. activity.
Important for forecasting demand:
The concept of IEoD can be used for forecasting demand for goods over a period. Consequently, it helps in approximating the required production level of several commodities at a specific point in time in the future. However, you can use the income elasticity of the demand calculator for the crucial values for IEod. That plays a significant role in economic planning.
Important for classification of normal & inferior goods:
The idea of income elasticity of demand is used to define defective and standard goods. The products whose income elasticity is positive for all levels of revenue are termed normal products. Apart from this, the products for whose income elasticity are negative beyond a specific level of revenue are termed as inferior goods.
Planned emerging markets:
In developing countries such as Nepal, with the improvement of living standards, the demand for certain commodities is expected to grow much faster than the demand for others. In the initial stage, the income elasticity of food demand tends to be higher. With the increase in income, people are not satisfied with the food shortage, which leads to inflation. When planners know the income elasticity of demand for public goods and services, they can take appropriate measures to balance supply and demand.
Important for making marketing strategies:
The theory of income elasticity of demand and the use of free income elasticity calculator is more beneficial during creating marketing strategies. For instance, a company producing expensive goods should concentrate its marketing efforts on different media that reach high income individuals.
Items whose demand is directly proportional to the income of the clients are known as standard items. In simple words, items whose demand increases with an increase in revenue and whose market falls with the downfall in income is a regular item, e.g., jewelry. The coefficient of income elasticity of these items is always positive.
Items whose demand is inversely proportional to the revenue of the clients are known as inferior goods. Apart from that, defective items are items whose demand downfall increases in income and vice versa, e.g., budget mobile phones. The coefficient of income elasticity of these items is always negative.
The Engel curve shows the slope of the demand curve in response to changes in income. The Engel curve of commodities reflects their income elasticity, indicating whether a commodity is low-quality, ordinary or luxurious. The law of angels states that the poorer the family, the more money they spend on groceries.
Importance for anti-monopoly legislation:
With the support of anti-monopoly legislation, the concept of cross-elasticity of demand has been put into practical use. When a particular seller unscrupulously evaluates or purchases substitutes for his products, monopolistic behaviors against him will occur. It is only a problem to draw a line between fair competition and monopoly, but it is a basic concept.
Hence, the income elasticity of the demand calculator depicts the responsiveness of the quantity demanded of a particular item to the change in income of the customers. The income elasticity of demand is also determined by the ratio of the percentage variation in the market for a product to the percentage change in income.