Real-life examples

After the financial crash of 2008-2009, incomes dropped in the UK. This led to a rise in demand for inferior goods, allowing supermarkets such as Aldi and Lidl to take advantage and grow rapidly. Paradoxically, a fall in income had led to a rise in demand, but this can be explained by looking at opportunity costs and the alternatives available.

However, sales of tea, which is considered a necessity, continued to rise despite the falls in income, reaching an all-time high in 2010 (they have dropped since due to increasing consumption of coffee - this is an example of changing preferences affecting demand for a product).

In the year from the end of 2008 to the end of 2009, median household income in the United Kingdom dropped from, £25,691 to £25,194, a fall of 1.93%. Sales of passenger cars went from 2,131,795 to 1,994,999, a fall of 6.41%. The fact that sales of cars dropped more than income indicates that cars are income elastic, suggesting that buying a new car is a luxury.

	Created by Harry Lewis about 7 years ago

Income elasticity of demand - definition, calculation and significance