In the case of economics, income has many implications which economics tries to explain through various theories and assumptions, income elasticity of demand is one of them. According to the income elasticity of demand, an individual will behave and spend differently if his or her income is increasing or decreasing which in turn will impact the general demand for goods or services. In simple words income elasticity of demand measures the sensitivity of demand with respect to the income of individuals, there are 5 types of income elasticity of demand, let’s look at those types in detail –
Income Elasticity of Demand Types
High Income Elasticity of Demand
In this case as the income of the consumer increases the demand for goods increases even more resulting in profits for companies selling such goods. In simple words, in the case of high-income elasticity, the proportionate change in demand for a product is higher than the change in the income of the consumer.
Hence just like in the case of stock markets, high beta stocks tend to outperform the general stock markets which imply that they rise more when the market is rising and fall more when the stock market is falling in the same way demand for goods in case of higher-income elasticity work that is their demand rise more than the income of the individual and fall more with the decline in the income of an individual.
Same Income Elasticity of Demand
In this case as the income of the consumer increases the demand for goods increases in the same proportion as the income of the consumer and thus companies producing goods will hope that the income of the consumer keeps increasing leading to a rise in demand for their goods.
Low Income Elasticity of Demand
In this case, as the income of the consumer increases the demand for goods increases at a slower rate than the income of the consumer, and hence this situation is similar to lower beta stocks in stock markets just like lower beta stock rise or falls at a much slower pace when stock market rise or fall in the same way demand for goods having lowe income elasticity will rise or fall less than increase or decrease in the income of an individual.
Zero Income Elasticity of Demand
As the name suggests, in this case, the demand for good remains constant irrespective of the income of the consumer and hence if the income of the consumer rise or falls it has no impact on demand for such goods. Hence for example in the case of toothpaste, there is no impact on its demand if the income of the consumer rise or falls as people won’t be using more toothpaste if their income is rising neither they will reduce the consumption of toothpaste if their income is falling.
Negative Income Elasticity of Demand
In this case, as the income of the consumer rises the demand for some goods starts to fall and if the income of the consumer falls then demand for such goods began to rise and hence such goods have a negative income elasticity of demand. Inferior goods are ideal examples of negative income elasticity of demand because, with the rise in income of the consumer, the consumer has access to higher quality alternatives, and thus there is a decrease in demand for inferior goods.
As one can see from the above that income affects the consumption of goods in different ways and that is the reason why companies should be aware of the relation between income with the goods they are producing so that they can plan their strategy according to income segmentation of the consumers they are targetting.