Importance of income elasticity to firms Essay

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INTRODUCTION In any economy, the levels of incomes of the population determine the level of demand of commodities produced and made available in that economy. The higher the income, the higher the demand of commodities and vice- versa when there is low incomes. Income elasticity is when income affects demand. This happens when income is increased in which certain goods such as inferior goods, the demand decreases. As for normal goods, the quantity demanded increases when income increases which in this case is regarded as “positive income elasticity.” Conversely, the quantity demanded for inferior goods decreases when income increases and this is referred to as “negative income elasticity.” Meanwhile, there are some normal goods which …show more content…
Small food companies need to lower prices to compete with generic brands, items consumers often buy during tough economic periods.
Another importance of income elasticity to firms is that higher revenues and profits may be realized as noted by Rick (2013) in his publication, “The importance of income elasticity in decision making” that a strategy for a small companies is to focus marketing efforts on higher-income consumers when consumer income elasticity is high as individuals may be less sensitive. When income elasticity is high, adopters and innovators may shop these products making these firms to earn higher revenues and profits.
Income elasticity will also make firms to engage into product life-cycle management though challenges come as a product ages and more substitutes are introduced. When this happens the firm will diversify its product line to attract consumers with less disposable income. Consequently, income elasticity will enable firms to make decisions whether to down size labour as consumption- demand falls for their products and services especially in recessionary periods as cost of production may be unbearable.
Meanwhile, income elasticity of demand can be generally used as an indicator of industry health, future consumption patterns and as a guide to firms’ investment decisions (Frank, Roberts, 2008, p.125).
Businesses make decisions