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Income Elasticity

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The Use of Income Elasticity in Credit Cards Promotions Income elasticity refers to the degree of interdependency between the change in demand quantity for a specific commodity and the variation in real income. Sensitivity of the demand quantity with respect to corresponding changes in the incomes of the consumers is termed as income elasticity of demaand (Haque 21). It is calculated by the formula below: For instance, if there is a 15% increase in the amount required for a definite commodity due to an increase in income of 10%, the income elasticity of demand for that good is 1.5. The extent, to which the amount of demand for a certain commodity fluctuates, in response to a deviation in income, relies on whether the commodity is either a …show more content…

Therefore, normal goods possess positive income elasticity. The quantity of normal necessities demanded will rise with the revenue but at a measured speed than that of luxury goods. This phenomenon is due to the fact that consumers will opt to buy more extravagant goods and services rather than more of the necessities with their improved incomes (Haque 18). During a time period of improved incomes, the demanded quantity for luxurious commodities will rise at a faster rate than the demanded quantity of necessities. The demanded quantity of luxury products in response to variations in income is very sensitive. On the other hand, inferior goods exhibit an undesirable income elasticity of demand, that is a rise in incomes causes a decrease in the demand for the inferior goods. For instance, an increase in income causes a drop in the demanded quantity of generic food …show more content…

An expansion of the economy brings about a corresponding increase in quantity demanded for normal goods while a contraction in the economy causes a decline in the demand for the normal goods. On the contrary, the demand for inferior goods is not recurrent (Pech 24). The more the positive value for income elasticity of demand for a product is, the more sensitive consumer demand is to the fluctuations in national income. Banks can take advantage of the income elasticity of demand by analyzing the patterns in demand for money by its customers as their real income changes. Banks can provide customers with more credit cards should there be a period of economic expansion marked by a substantial increase in the income of customers (Hosek 5). By evaluating the income elasticity of demand for each of its different credit cards, a bank is able to predict how the demand for each type of credit card will change in response to variations in the national income of the

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