Question

Q. With reference to Income Elasticity of Demand (IED), consider the following statements:

Which of the statements given above is/are correct?

• A. 3 only
• B. 2 only
• C. 1 and 3 only
• D. 1, 2 and 3

Answer 1

The correct option is C 1 and 3 only

Explanation:

• Positive income elasticity of demand: It refers to a situation when the demand for a product increases with an increase in consumer’s income and decreases with a decrease in consumer’s income. The income elasticity of demand is positive for normal goods.
• Negative income elasticity of demand: It refers to a kind of income elasticity of demand in which the demand for a product decreases with an increase in a consumer’s income. The income elasticity of demand is negative for inferior goods and Giffen goods.
• IED between 0 and 1: It refers to the income elasticity of demand whose numerical value is between 0 and 1. This is because there is very little effect of an increase in consumer’s income on the demand for products. The income elasticity of demand is between 0 and 1 in the case of essential goods.