UGC NET COMMERCE December 2018 Q93
| LIST-I | LIST-II |
| (a) Income elasticity less than unity | (i) Competitive goods |
| (b) Cross elasticity less than unity | (ii) Inferior goods |
| (c) Cross elasticity less than zero | (iii) Superior goods |
| (d) Income elasticity less than zero | (iv) Complementary goods |
CODES
| (a) | (b) | (c) | (d) | |
| 1 | (i) | (ii) | (iii) | (iv) |
| 2 | (iv) | (i) | (ii) | (iii) |
| 3 | (iii) | (i) | (iv) | (ii) |
| 4 | (iv) | (iii) | (i) | (ii) |
- Option : C
- Explanation : As with own-price elasticity and cross-price elasticity, the good or service can also be classified according to its income elasticity:
EY > 1 Superior good
EY > 0 Normal good
EY < 0 Inferior good
If the product’s income elasticity is greater than zero, then the good is categorized as a normal good—that is, the quantity demanded of a normal good increases with any increase in the consumer’s income. As we might expect, the vast majority of goods and services can be classified as normal goods, as in the above example. A subcategory of normal goods are superior goods, whose income elasticity is greater than one. Superior goods have a proportional increase in the quantity demanded that is greater than the increase in consumer income. Superior goods usually encompass high-end luxury products such as fancy sport cars and business jet travel.
The other goods categorized according to income elasticity are inferior goods. Inferior goods have income elasticity values less than zero, indicating that, for any increase in income, the quantity demanded decreases. This peculiar situation occurs when products have a price advantage over competitors but are generally not perceived as quality goods. Therefore, when consumers’ income increases, they are more willing to purchase the perceived better product. Examples of inferior goods might include generic products versus brand names or, in some markets, coach travel versus first-class seats.
The concept of elasticity is critical to understanding pricing policies of any industry, especially the air transportation industry, and, as the earlier discussion has shown, elasticity can be used to determine the optimum price level where total revenue is maximized. Ultimately, revenue management has its foundation in this concept since elasticity can be used to help manage both pricing and capacity.
