Question

2: Compare and contrast the income elasticity of demand for gold bracelets (ngold bracelets) and the income elasticity of demand for shampoo (nghampoo). Which product's income elasticity of demand is higher? Explain using 1-2 sentense

Answer 1

Income elasticity of demand represents the degree of responsiveness of quantity demanded of a good to a small change in the income of buyers. Income elasticity of demand for a good depends upon nature of the good. Gold is a luxury good so its demand is in elastic(e>1), so an increase in the income( say 5%l will lead to an increase in the demand in greater proportion (say 10%), while on the other hand shampoo ( without brand) is an essential good, so its demand will be income inelastic(e<1), it means an increase in the income ( say 10%) will lead to an increase in demand in a lower proportion (say 2% ).