Answer to Question #95873 in Microeconomics for Sana

Question

It has been estimated that for high income earners in the uk the income elasticity of demand for coffee capsules is 1.2 and for normal instant coffee is 0.5. Explain what the data means and account for the difference in the two estimates.

Answer 1

Income elasticity of demand measures the responsiveness of quantity demand of a particular good or service to a change in the consumer's income.

$$Income\ elasticity\ of\ demand =$$

$\frac{ \%\ change\ in\ quantity\ demanded}{\%\ change\ in\ income}$

The income elasticity of demand for coffee capsules is 1.2

This statement implies that with every 1 percent change in the income of an individual, there is a 1.2% change (in the same direction as the income) in the demand for coffee capsules.

The income elasticity of demand for normal instant coffee is 0.5

This statement implies that with every 1 percent change in the income of an individual, there is a 0.5% change (in the same direction as the income) in the demand for normal instant coffee.

Thus if there is 1% increase in a consumer's income, his demand for coffee capsules will go up by 1.2% while the demand for normal instant coffee would go up by only 0.5%.

This is perhaps because the consumer perceives coffee capsules to be relatively superior than normal instant coffee.