i.
Nature of the
need the good covers:
It is seen that the percentage of income spent on food declines as the level of
income increases. This is known Engel’s law.
It is noticed that for a normal
good, increase in income, other things remaining the same, is associated with
increase in the quantity of goods purchased. A good whose income elasticity is
greater than one is called is luxury good. Foreign travel, in fact, has an
estimated elasticity of about 3, indicating that it can be considered as a
luxury good. Goods with income elasticities between zero and one are considered
necessities. On the other hand, a negative elasticity of demand implies an
inverse relationship between income and the amounts of goods purchases. Goods
with negative income elasticities are those that consumers will eventually stop
buying as their income increases.
ii.
The initial
level of income of a country: This means to say that depending on
the level of development of country different goods is categorized into luxury
or necessary items. E.g., a TV set is a luxury item in an underdeveloped
country whereas it is a necessity in a country with high per capita income.
iii. Time period: Consumptions patterns generally
adjust with a time-lag to changes in income. It is seen that consumers adjust
to rising income at a faster rate than to falling incomes, with respect to
their consumption practices.
It is seen that since a consumer is associated to a high
MPC (marginal propensity to consume) it becomes very difficult for him/her to
decrease the same overnight, due to falling incomes. However, the case is just
the opposite when an increase in the income takes place. In this case, the
consumer can increase his MPC even without any lag of time. This implies to say
that, it is always difficult for the consumer to adjust himself/herself to
falling incomes that to rising incomes.
No comments:
Post a Comment