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