Answer to Question #230340 in Microeconomics for Musawwir

Question

What economic information does the income elasticity of demand provide? How does the shape of the

Engel curve relate to the income elasticity?

Answer 1

Income elasticity of demand measures how responsive the quantity demand for a good or service is to a change in income. It provides on forecasting demand for a product over a period, which helps in estimating the required production level of different commodities at a certain point of time in the future. It is useful in decision making process of the product in question whether to increase price or not influencing revenues.

Engel curve shape depends on various population variables and how consumers in the market behave. The Engel's curve shape reflects its income elasticity of the product and can tell if the product is  inferior, normal, or luxury good. For example, the Engel curve has a negative gradient for inferior good which means that as the consumer has more income, they will buy less of the inferior.

The Engel curve for a normal curve has a positive gradient which means that as income increases, the quantity demanded increases. On luxury goods, the Engel curve remains upward sloping but it bends towards the Y-axis.