Explain the business decision based upon income elasticity

Question

Explain the business decision based upon income elasticity.

Answer 1

The perception of income elasticity can be utilized for the reason of taking fundamental business decision. A businessman can rely upon the facts as follows:

When income elasticity is greater than Zero, however, less than one, sales of the product will raise but slower than the common economic growth.

When income elasticity is greater than one, sales of his product will raise more quickly than the common economic growth.

Firms that demand functions have high income elasticity have good development opportunities in an expanding economy. That concept helps manager to take accurate decision during business cycle and also assists in forecasting the effect of changes in income on demand.