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Income Elasticity of Demand and Stock of Inventories

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The income elasticity of demand for your firm's product is estimated to be 0.75. A recent report in The Wall Street Journal says that national income is expected to decline by 3 percent this year.

a. What should you do with your stock of inventories?
b. What do you expect to happen to your sales?
c. How would you answer parts (a) and (b) if you expected a 5 percent increase in income instead of a decrease?

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Solution Summary

This response looks at the predicted income elasticity of demand for a firm's product and the future of the firms inventories and sales.

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The income elasticity of demand for your firm's product is estimated to be 0.75. A recent report in The Wall Street Journal says that national income is expected to decline by 3 percent this year.

We can find the % change in quantity demanded using the formula:
Income elasticity of demand = % change in quantity demanded ...

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Radhika Lakshmi, MPhil
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  • MPhil, Madurai Kamaraj University
  • MCom, Annamalai University
  • IATA, International Air Transport Association
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