Question

Utilizing the concept of Income Elasticity, explain how a manager may use economic forecasts to improve performance.

Answer 1

With the help of Income elasticity a manager can make economic forecasts in order to improve performance. It plays an important role in demand forecasting. For this the knowledge about income elasticity is very important. Long term production always depends on the income elasticity of the product. Income elasticity can be defined as the percentage change in quantity demanded of a product by consumers to a percentage change in income of the consumers. Income elasticity will give an idea about how the demand will change according to the income change for their products. The effect of change in income on the volume of sales can be forecast. Knowledge about the income elasticity will help the firm to make decisions about whether the price of products should be increased or decreased. If there is positive income elasticity of demand and the income of consumer falls, the fall in demand can be compensated by reducing price of the commodity.

This way, utilizing the knowledge regarding income elasticity of demand will help thre manager of a firm to improve their performance and earn profits and reduce losses.