Question

Income elasticity of demand for inferior goods is negative.

Answer 1

Income Elasticity of Demand

The elasticity of demand measures how factors such as price and income affect the demand for a product. The income elasticity of demand measures how the change in a consumer’s income affects the demand for a specific product. You can express the income elasticity of demand mathematically as follows:

Income Elasticity of Demand (YED) = % change in quantity demanded / % change in income

The higher the income elasticity of demand for a specific product, the more responsive it becomes the change in consumers’ income.

Now, we can measure the income elasticity of demand for different products by categorizing them as inferior goods and normal goods. The income elasticity of demand for a particular product can be negative or positive, or even unresponsive.

Inferior Goods

Inferior goods have a negative income elasticity; that is YED is less than 0. If the consumers’ income increases, they demand less of these goods. Inferior goods are called inferior because they usually have superior alternatives.

For instance, if a consumer’s income increases, then he/she might start taking a cab instead of opting for public transport. Public transport, in this case, is an inferior good.

Usually, when the economic growth is good and there is an increase in consumers’ income, the demand for inferior goods reduces and there is an inward swing of the demand curve.

Consequently, when the incomes reduce and price of goods increases because of recession, then the demand for inferior goods increases, thereby causing an outward swing of the demand curve.