A negative income elasticity indicates an inferior good,
where the quantity demanded decreases as aggregate
incomes increase. In other words, with higher incomes,
consumers buy less of an inferior good and substitute
it with better quality goods (e.g. buying branded goods
rather than supermarket own-brands).
Key factors influencing demand elasticities
Demand elasticities can be influenced by several factors.
The individual characteristics of a good or service will
have an impact, but there are also a number of general
factors that will typically affect the sensitivity of demand:
Availability of substitutes. The elasticity is typically •
higher the greater the number of available substitutes,
as consumers can easily switch between different
products.
Degree of necessity. Luxury or highly valued products •
typically have a higher elasticity. Some products that
are initially a luxury are habit forming and can become
“necessities” to some consumers. Bread has a low
elasticity as it is considered a necessity, as does
tobacco because it is habit forming.
Proportion of the budget consumed by the item. •
Products that consume a large portion of the
consumer’s budget tend to have greater elasticity.
Time period considered. Elasticities tend to be greater •
over the long run because consumers have more time
to adjust their behaviour.
Whether the good or service is demanded as an input •
into a final product or whether it is the final product.
If the good or service is an input into a final product
then the price elasticity for that good or service will
depend on the price elasticity of the final product, its
cost share in the production costs, and the availability
of substitutes for that good or service.
Each of these general factors, along with the specific
characteristics of the product, will interact to determine
its overall responsiveness of demand to changes in prices
and incomes.