SumitWhat this tells us is that there is a positive and negative relationship between income and demand. On the one hand, the demand for a product increases the more income you have. On the other hand, demand tends to go down with an increase in income.
This example shows that demand tends to increase with income. In this case, a new car costs as much as $50,000. If you want to buy one, you need to earn an income of $50,000 a year. The idea is that the more money you earn, the more cars you can buy, which means you will pay more for a car than someone who earns less money.
Income elasticity of demand, simply put, is the relationship between the demand for a product and the income that you can earn for that product.
In the example above, the income elasticity of demand is 0.86, which means the demand for a new car is 86% greater than a used one. This means that the demand for a car will increase with income.
This is an excellent example of income elasticity of demand, and one of many that illustrates how the demand for a product will increase with income. In our case, a new car is an option that will be more affordable as income increases, which means we can increase our income by buying a car. This is exactly what we did.
For the above example, if income were fixed at $1,000,000 per year, then the demand for a car would be $1,000,000. At the same time, if income were fixed at $10,000,000 per year, then the demand for a car would only be $1,000,000. It’s very, very interesting that a company can make both numbers equal.
Income elasticity is one of those really simple concepts that can be difficult to understand for non-economists. It basically tells you how much income you can expect to spend on each item in a given time period. We’ve graphed income elasticity of demand (IEOD) for a couple of different income elasticity levels. The IEOD is given in units of dollars per year.
Lets use the example of a person who needs a car every year to work a 40 hour week at a job. At a company with 1,000,000 cars, you would expect to spend 1,000,000$ a year. At an income elasticity level of 20, that would translate into $1,000,000. This is only an example, and with incomes much higher and lower, you would expect to spend a much greater proportion of income in order to satisfy your need.
Now, we can also think of elasticity in terms of units of time. Say someone needs a car every year for a year or two. At an income elasticity level of 20, that would translate into 20 cars per year. If someone spends one day of their year with no cars, they would be spending 1,000,000 per year, which is equal to 20,000,000 per year.
This is the kind of thing that will be very useful in a world where people spend a lot of time with nothing to do and spend a lot of money on other things, as well as what would become an increasingly scarce resource as time passes.
