Assignment

1. What does this mean when it is said that a good is ‘income elastic’? 2marks

If the value of the income elasticity is greater than one.

2. Give two examples of goods that might be income inelastic. 2marks

Petrol, salt

3. What is the formula for calculating income elasticity of demand? 2marks

%change in quantity demanded /%change in income

4. If incomes rise by 12 per cent and demand rises by 20 per cent, what is income
elasticity of demand? 4 marks

YED= PERCENTAGE CHANGE IN QD

PERCENTAGE CHANGE IN INCOME

20/12=1.67

5. A good has income elasticity of -0.9. Is this good normal or inferior? 1 mark

Normal

6. State two factors that might affect income elasticity of demand and explain each. 4marks

The rate at which the desire for a good is satisfied as consumption increases. The quicker
people are satisfied, the less they will want when income increases.

The level of income of consumer’s people will respond differently from rich people to a rise
in their income.

7. State two implications of income elasticity for businesses. 2marks

Income elasticity of demand can be used for predicting future demand of any goods and
services in a case when manufacturers have knowledge of probable future income of the
consumers.