Question

What are the factors that determine the income elasticity of demand? Give examples of at least two products that fit in that category.

Answer 1

Nature of the good is the factors that gets to affect the income elasticity of demand where inferior good has negative income elasticity while the normal good has positive income elasticity and luxury good has income elasticity greater than 1 and necessary good has income elasticity less than 1. Apart from that availability of close high or low end substitutes also get affect the income elasticity of demand. For example if the income increases people tend to move onto the the luxury cars more proportionately then that of necessary goods such as rice. Therefore these two fit into the income elasticity of demand variations.