What happens to consumer demand when income changes?
A decrease in income generally leads to decreased demand for normal goods and services and increased demand for inferior goods. This concept is known as 'income elasticity of demand'.
Income Elasticity of Demand
Income elasticity of demand measures how the quantity demanded for a good changes as income changes. It helps us understand how consumers' purchasing behavior shifts in response to changes in their income levels.
For normal goods, which are goods that people buy more of as their income rises, a decrease in income typically results in lower demand. On the other hand, for inferior goods, which are goods that people buy less of as their income rises, the demand may actually increase when income falls.
For example, when someone's income decreases, they may start cutting back on luxury items like dining out at restaurants (a normal good) and opt to cook at home more often (an inferior good).
Understanding income elasticity of demand is essential for businesses to anticipate how their products or services will be affected by changes in consumer income. By analyzing this concept, companies can adjust their marketing strategies and product offerings to better cater to shifting consumer demands in response to income changes.