When incomes drop, the demand for an elastic product ______

When incomes drop, the demand for an elastic product ______

• A. Tends to decrease
• B. Tends to increase
• C. Remains unchanged
• D. Becomes inelastic

Answer: (A)

When income changes, the responsiveness of demand to that change depends on income elasticity. For an elastic product, demand is highly sensitive to income; its income elasticity is large and positive. So when incomes fall, people cut back a lot on these goods because they’re often nonessential or luxury items and buyers have less money to spend. That stronger income-driven reaction makes quantity demanded decrease significantly. It wouldn’t tend to increase with a drop in income, since that would imply negative income elasticity (as with inferior goods), and it wouldn’t stay unchanged or “become inelastic” just because income fell.

When income changes, the responsiveness of demand to that change depends on income elasticity. For an elastic product, demand is highly sensitive to income; its income elasticity is large and positive. So when incomes fall, people cut back a lot on these goods because they’re often nonessential or luxury items and buyers have less money to spend. That stronger income-driven reaction makes quantity demanded decrease significantly. It wouldn’t tend to increase with a drop in income, since that would imply negative income elasticity (as with inferior goods), and it wouldn’t stay unchanged or “become inelastic” just because income fell.