Page 129 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 5. Income of the Consumer: Those people having their income very much or very less, their demands
are generally inelastic. The reason is that it does not affect demand by them as much by increase
or decrease in price. Opposite to it, the demand of medium class people is elastic. On increment in
price of the commodities demanded by these people, their demands become comparatively less.
6. Habit of the Consumer: The demand of those commodities is inelastic for which people get addicted
like cigarette, coffee etc. The reason is that on increment in the prices of these commodities also the
demands of costumer do not decrease.
7. Proportion of Income Spent on a Commodity: The ratio of income spent on a commodity is directly
proportional to the elasticity of demand. Those commodities on which customer spends very less
ratio of his income like newspaper, toothpaste, shoe polish, etc., the demand of those commodities
is inelastic. The demand decreases on increasing the price of these commodities. Opposite to it, the
demand of those commodities on which the customer spends more of its income like garments, best
food, desert cooler, fruits etc. is elastic. The demand decreases on increasing their prices because
customer starts finding their substitute commodity.
8. Price Level: The demand of very expensive and very
cheap commodities is inelastic. The demand of more The availability of commodities and the
expensive commodities like diamond, jewellery, level of goods are the two main things which
expensive carpets etc. is inelastic. The demand changes responsible for demand of elasticity.
by little on changing the prices of these commodities.
In this way, the demand of those commodities which have very less price like matchbox, postcard,
cheaper vegetables etc. is also inelastic. The demand does not affect as much on change in price of
these commodities. Opposite to it, the demand of those commodities which are medium price goods
or those which are neither very cheap nor very expensive is elastic. The demand is comparatively
high on decrease in price of these commodities.
9. Time: The demand is more elastic in long-term in comparison to short-term. As the duration of
time increases the customer gets more time to adjust with the new prices, so the demand will be
more elastic. If customer gets less time to adjust with the new prices then the demand will be more
inelastic. Therefore, demand of any commodity is inelastic in short-term and elastic in long-term.
10. Complementary Goods: The goods which demand as in joint or adjustable are generally inelastic
like car and petrol, pen and ink, camera and film. If the price of petrol increases, the demand will
be the same if the demand of Cars would remain same.

6.16 Income Elasticity of Demand

Other things mean, on the stability of the price of specific commodity, prices of related commodities,
choice of the customer etc., the ratio of the percentage change in demand of specific commodity on the
percentage change in income of a customer is known as income elasticity of demand.

“Income elasticity of demand means the ratio of the percentage change in quantity demanded to percentage
change in income."
—Watson
“The responsiveness of demand to change in income is termed as income elasticity of demand."
—Richard G. Lipsey

6.17 Measurement of Income Elasticity of Demand

Income elasticity of demand can be measured by the following formula—
Proportionate or Percentage Change in Quantity Demanded

E = ______________________________________________________
y Proportionate or Percentage Change in Income

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