Answer to Question #112540 in Microeconomics for ayesha

Question

Explain the significance of income elasticity of demand values that are negative, positive and zero

Answer 1

Income elasticity of demand measures the responsiveness of the quantity demanded for a commodity as a result of a change in consumer's level of income.

There three types of income elasticity of demand: Positive, Negative and Zero

• Positive income elasticity of demand signifies that it is a normal good whose quantity demanded increases with an increase in income level of a consumer. If the income elasticity of demand is less than 1, then it is a necessity good but if it is more than 1, then it is a luxury or superior good.
• Negative income elasticity of demand implies that it is an inferior good. Increase in consumer income leads to less demand of quantities of the good and sometimes might be replaced by luxurious substitutes.
• Zero income elasticity of demand manifests when an increase in consumer income is not linked in anyway with a change in quantity demanded of a good.