Significance of the Concept of Income Elasticity of Demand

Here we understand the Concept of Income Elasticity of Demand in detail.

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Significance of the Concept of Income Elasticity of Demand:

The concept of Income elasticity of demand is very useful in practice for the following reasons, they are as follows:

It helps us in understanding and classifying the commodities. For eg, if income elasticity is positive, the commodity seems to be normal. If it is negative, the commodity seems to be inferior If it is positive and greater than one, the commodity is a luxury. If it is positive and less than one, the commodity is a necessity.
The numeric values of income elasticity of demand are highly useful to individual producers. With the help of these values, they can identify expanding and contracting industries. If income elasticity of demand for product X is positive, its demand can be expected to increase with the increase in person's incomes. Producers can plan beforehand to increase productive capacity in X industry. If suppose income elasticity of demand for product Y is negative, its demand can be expected to decline with the increase in person's money incomes. Hence producers can take steps to reduce productive capacity of Y.
It is helpful to the government or planning commission also. They can project future level of demand for various goods on the basis of the information about the values of their income elasticity of demand and possible increase in money incomes of the person. These demand projections can be used to fix output targets for different industries. They can prepare a programme of resource allocation among industries so output targets may be realised on time.

Income Elasticity of Demand- Significance of the Concept of Income Elasticity of Demand.

Kinnari

Tech writer at NewsandStory