Importance of Income Elasticity of Demand

Uses or Importance of Income Elasticity of Demand

Some important uses of income elasticity of demand are as follows:

1. Useful to know about stage of trade cycle: Income elasticity of demand for necessary goods is low. Therefore, during prosperity, the sellers of such goods will not be benefited much and during the depression, they are not affected much. During prosperity, the income of the consumer increase, and hence they are capable of affording goods that are more luxurious. The sellers of such goods are benefited. During the depression period, demand for such goods decreases rapidly and sellers are adversely affected.

2. Useful for forecasting demand: The concept of income elasticity of demand can be used for forecasting demand for a product over a period. Therefore, it helps in estimating the required production level of different commodities at a certain point in time in the future. This knowledge is also important for economic planning.

3. Useful for classification of normal & inferior goods: The concept of income elasticity of demand can also be used to define the normal and inferior goods. The goods whose income elasticity is positive for all levels of income are termed as normal goods. On the other hand, the goods for whose income elasticity is negative beyond a certain level of income are termed as inferior goods.

4. Useful for making marketing strategy: The concept of income elasticity of demand can be useful in making a marketing strategy. For example, a firm producing luxury items should concentrate its marketing efforts on media that reach the high-income group of people.