Answer to Question #254842 in Macroeconomics for marcococas

Question

The income elasticity of demand for primary commodities tends to be relatively low, while the income elasticity of demand for manufactured goods and services tends to be higher. Examine the likely effects of this for individual producers and for the economy as a whole. 

Answer 1

The income elasticity of demand is a measure of how responsive demand is to changes in income; it is calculated by dividing the percentage change in quantity demanded by the percentage change in price.

The primary sector is a subset of the economy that includes agriculture, fishing, forestry, and all extractive activities (such as mining). Primary commodities are goods that are produced directly from natural resources or the factor of production 'land.'

The manufacturing industry takes raw materials and turns them into finished goods. The manufacturing sector is concerned with the use of raw materials from the primary sectors, such as iron and coke, as well as the production of finished goods, such as automobiles. The service sector involves the production of services rather than end products and may include the transportation, distribution, and sale of goods from a producer to a consumer, as in wholesale and retailing, pest control, or entertainment. Entertainment, travel, banking, insurance, health care, education, and so on are some examples.