Uses of Elasticity of Demand
The business firms take into account the elasticity of demand when they take decisions regarding the pricing of goods.
The elasticity of demand concept is used by the government in economic policy regarding the regulation of prices of farm products.
- Income Elasticity of Demand
It may be defined as the ratio of proportionate change in the quantity demanded of a commodity to a given proportionate change in income of the consumer.
Fig: Equation of income elasticity
If, for instance, consumer’s income rises from Rs. 1000 to Rs. 1200, his purchase of the good X (say, rice) increases from 25 kgs per month to 28 kgs, then his income elasticity of demand for rice is:
Ei = (3/200) X (100/25) = 0.60
From this, we conclude that the quantity demanded of rice rises by 0.60 percent if the income of the consumer rises by one percent.