The Government announces a 10 per cent dearness allowance to its employees. As a result, average monthly salary of Government employees increases from ₹20,000 to ₹ 22,000. Following the pay hike, monthly petrol consumption of government employees increased from 150 litres per month to 165 litres per month:
Income Elasticity Calculation Explained
Income Elasticity of Demand (IED) measures how the quantity demanded of a good responds to a change in consumer income. The formula is:
$ \text{IED} = \frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Income}} $
Calculating Percentage Changes
First, determine the percentage change in income and the percentage change in petrol consumption.
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Percentage Change in Income:
- Initial Income = ₹20,000
- Final Income = ₹22,000
- Change in Income = ₹22,000 - ₹20,000 = ₹2,000
- $ \% \text{ Change in Income} = \left( \frac{₹2,000}{₹20,000} \right) \times 100\% = 10\% $
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Percentage Change in Petrol Consumption:
- Initial Consumption = 150 litres
- Final Consumption = 165 litres
- Change in Consumption = 165 litres - 150 litres = 15 litres
- $ \% \text{ Change in Quantity Demanded} = \left( \frac{15 \text{ litres}}{150 \text{ litres}} \right) \times 100\% = 10\% $
Determining Income Elasticity of Petrol
Now, apply the IED formula using the calculated percentages:
$ \text{IED} = \frac{10\%}{10\%} = 1 $
The Income Elasticity of Petrol consumption is 1. This indicates that petrol is a normal good, and its demand increases proportionally with income.
Important Questions from Demand analysis
The supply curve of cars is expected to shift rightwards with:
i. An increase in the price of cars
ii. A decrease in fuel prices
The supply curve of a normal good is ____________ sloping. It depicts ___________ on the x-axis and ___________ on the y-axis.
The demand curve gives the quantity demanded by the consumer at each ____________.
Which of the following statements is INCORRECT in the context of demand function?
Marginal Product is defined as:
