This shows that the curve E 1 is income elastic over much of its range. This shows that the income elasticity of E 1 , curve over much of its range is larger than zero bur smaller than 1. In the backward-sloping range, draw a tangent GC at point C. This shows that over the range the Engel curve E 3 is negatively sloped, E y is negative and the commodity is an inferior good. But before it bends backward, the Engel curve E 3 illustrates the case of a necessary good having income inelasticity over much of its range.
There are certain factors which determine the income elasticity of demand. The first is the nature of commodity. Commodities are generally grouped into necessities, comforts and luxuries. But this grouping of commodities depends upon the income level of a country. A car may be a necessity in a high-income country and a luxury in a poor low-income country. Further, income elasticity of demand depends on the time period. Over the long-run, the consumption patterns of the people may change with changes in income with the result that a luxury today may become a necessity after the lapse of a few years.
Again, the demonstration effect also plays an important role in changing the tastes, preferences and choices of the people and hence the income elasticity of demand for different types of goods. Several Uses of Commodity: The elasticity of demand also depends on the number of uses of the commodity. Such as, if the commodity is used for a single purpose, then the change in the price will affect the demand for commodity only in that use, and thus the demand for that commodity is said to be inelastic.
Whereas, if the product has several uses, such as raw material coal, iron, steel, etc. Thus, the demand for such products is said to be elastic. Whether the Demand can be Postponed or not: If the demand for a particular product cannot be postponed then, the demand is said to be inelastic.
Such as, Wheat is required in daily life and hence its demand cannot be postponed. On the other hand, the items whose demand can be postponed is said to have elastic demand.
Such as the demand for the furniture can be postponed until the time its prices fall. The substitutes are the goods which can be used in place of one another. The goods which have close substitutes are said to have elastic demand. Such as, tea and coffee are close substitutes and if the price of tea increases, then people will switch to the coffee and demand for the tea will decrease significantly.
The three factors mentioned above may reinforce each other in determining the elasticity of demand for a commodity or they may operate against each other. The elasticity of demand for a commodity will be the net result of all the forces working on it.
The element of time also influences the elasticity of demand for a commodity. Demand tends to be more elastic if the time involved is long. This is because consumers can substitute goods in the long run. In the short run, substitution of one commodity by another is not so easy. The longer the period of time, the greater is the ease with which both consumers and businessmen can substitute one commodity for another.
For instance, if the price of fuel oil rises, it may be difficult to substitute fuel oil by other types of fuels such as coal or cooking gas. But, given sufficient time, people will make adjustments and use coal or cooking gas instead of the fuel oil whose price has risen.
Likewise, when the business firms find that the price of a certain material has risen, then it may not be possible for them to substitute that material by some other relatively cheaper one. But with the passage of time they can undertake research to find substitute material and can redesign the product or modify the machinery employed in the production of a commodity so as to economise in the use of the dearer material. Therefore, given the time, they can substitute the material whose price has risen.
We thus see that demand is generally more elastic in the long run than in the short run. Essay on Demand Forecasting: Top 8 Essays Products Economics.
Income elasticity of demand is high when the demand for a commodity rises more than proportionate to the increase in income. Assuming prices of all other goods as constant, if the income of the consumer increases by 5% and as a result his purchases of the commodity increase by 10%, then E = .
Determinants of Elasticity of Demand. Apart from the price, there are several other factors that influence the elasticity of demand. These are: Consumer Income: The income of the consumer also affects the elasticity of demand. For high-income groups, the demand is said to be less elastic as the rise or fall in the price will not have much effect on the demand for a product.
Price elasticity of demand has four determinants: product necessity, how many substitutes for the product there are, how large a percentage of income the product costs, and how frequently its purchased, according to Economics Help. The price elasticity of demand (PED) is a measure that captures the responsiveness of a good’s quantity demanded to a change in its price. More specifically, it is the percentage change in quantity demanded in response to a one percent change in price when all other determinants of demand .
Let's look more closely at each of the determinants of demand. Price. Price, in many cases, is likely to be the most fundamental determinant of demand since it is often the first thing that people think about when deciding how much of an item to buy. Calculating the Income Elasticity of Demand. Economics Lesson: The Demand Curve Explained. The 5 determinants of demand are price, income, prices of related goods, tastes, and expectations. A 6th, for aggregate demand, is number of buyers.