Introduction
Tour Itinerary
Destinations
Small Farm 1
Small Farm 2
Commercial Farm
Non Trad' Farm
Issues
Theories
Pov'ty Indicators
Commodities
Poverty
Econ. of Scale(1)
Income Elasticity
Infant Industries
Commodity Mkts
Econ. of Scale(2)
Lorenz Curve
Malthus
Measuring Pov'ty
Perf. Competition
Cycle of Poverty
Price Ceilings
Prod. Subsidies
Coffee Mkt.
Living Standards
Worksheets
Resources

Home Field Trips Rural Life and Agriculture Tour Income Elasticity of Demand

Theories

Income Elasticity of Demand

Next theory - Infant Industries >>

The amount of a good or service demanded is influenced by a number of factors. One such factor is the income of the consumer. For normal goods as consumers incomes increase the quantity demand increases, ceteris paribus. Graphically this is shown by the demand curve making a shift to the right.

Equally if consumers income falls the demand curve would shift to the left. Income elasticity of demand measures the extent to which demand changes in response to income changes.

The coefficient of income elasticity can be calculated by the following formula

The table below summarises the different values of income elasticity of demand.

A change in income can have a number of effects:

As the incomes of entire countries increase, the demand for imports will correspondingly change too. The concept of income elasticity of demand can be used to measure how responsive the demand for goods are to changes in aggregate income. The demand for many primary commodities has an income elasticity of demand coefficient of less than one. As incomes increase the demand for many of the commodities such as coffee will increase (though demand for some may even decrease) but by a proportionately smaller amount. If your allowance increases by 50% it is unlikely that you are going to increase you consumption of coffee by the same proportion! Sales will be slow growing and sluggish.

By concentrating on the gourmet coffees the Terranova estate is producing a more luxury product that has a higher income elasticity of demand coefficient. Hence, as the incomes of the consuming nations increase, the demand for their coffee will grow by a proportionately larger amount. Sales will increase more rapidly and thus be more profitable.

This analysis has assumed that the consuming nations incomes are increasing. You might like to consider what the impact might be of a worldwide recession on the Terranova Estates revenue and profitability.

Next theory - Infant Industries >>