The income elasticity of demand is the dependence of demand on changes in purchasing power. This indicator considers the impact on sales of a particular good.
The income elasticity of demand comes in several forms:
- Negative - implies a decrease in demand with an increase in income. At the same time, there is an inverse relationship between purchases and wages.
- Positive - shows that with an increase in income there is an increase in demand.
- Zero - suggests that with an increase in salary, sales will not change.
Low-quality goods can be attributed to a negative form of elasticity, almost all normal goods, including luxury, to a positive one. Zero elasticity are essential products (clothing, food, etc.).
The income elasticity of demand determines how much percent demand can change with an increase (decrease) in customer income by 1%. In different countries, wage growth encourages people to buy products at various levels. Thus, in advanced economies, demand for luxury goods is increasing . In developing countries, consumers are trying to stock up on durable goods. Studies have also shown that the elasticity of demand depends on the average level of income in the state. For example, sales for essential goods are high with low salaries. But with rising incomes, the share of food costs begins to decline.
The elasticity of demand in terms of price and income also depends on the social group. So, people with low wages spend most of it on products such as potatoes, bread, milk, that is, on essential goods. For this group, these benefits are very important, and sometimes even luxury. People with high income spend a lot on meat, fish, fruits, vegetables. For them, potatoes and bread are common products that they can easily purchase every day. The next layer of the population has even higher incomes, so it can spend them on a variety of high-quality goods, for example, exotic fruits, trips abroad, purchase of equipment, etc. For them, potatoes and bread are lower-order foods.
Studies have confirmed that the greater the share of income the population spends on food, the lower the welfare. Now in Russia, more than 70% of the population simply cannot satisfy their basic needs for goods. And a huge number of people live below the poverty line.
The income elasticity of demand for most products is positive. This means that when salaries increase, people begin to buy more normal goods. At the same time, they sometimes acquire lower products in smaller quantities. Thus, for potatoes, milk and bread, the coefficient of elasticity is negative.
The income elasticity of demand is influenced by several factors:
- The significance of the good for the family. If the product occupies an important place in the diet, then its elasticity is small.
- Whether the good is a daily necessity or a luxury. So, bread has less elasticity than a machine.
- Conservatism of demand. Consumers usually do not immediately switch to more expensive goods. People who are used to saving will continue to limit themselves by inertia for some time, and only then will they begin to buy better things and products.
The government of each country should strive to ensure that population incomes are constantly increasing, but this should not be associated with high inflation. Then the standard of living of people will increase significantly. They will be able to acquire high-quality and expensive goods, and will not look anxiously into the future and constantly save.