- Types of Markets in Economics
- Demand Function and Demand Curve
- Supply Function and Supply Curve
- Shifts in Demand and Supply Curves
- Aggregating Demand and Supply Curves and Concept of Equilibrium
- Excess Demand and Excess Supply
- Stable and Unstable Equilibrium
- Types of Auctions
- Four Methods of Distributing Government Securities
- Consumer and Producer Surplus
- Effects of Government Regulation on Demand and Supply
- Price Elasticity of Demand
- Income Elasticity of Demand
- Cross Price Elasticity of Demand
Income Elasticity of Demand
Income elasticity of demand is the responsiveness of quantity demanded to changes in income. The income elasticity of demand depends on the types of goods.
- Normal goods: The demand increases with the increase in income. Elasticity has a positive sign (e > 0). If income elasticity of demand of a good is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good.
- Inferior goods: The demand decreases with increase in income. Elasticity has a negative sign (e < 0)
If the income elasticity is zero, a change in income doesn’t affect the demand for good. Such goods are called sticky goods.
Note that what constitutes an inferior product for people in some income range may be a normal product for people in a lower income group.
Income elasticity = 0.4. It’s a normal good and demand is inelastic. A rise in incomes of 3% would lead to demand rising by 1.2%.
Income elasticity = 0.6. It’s an inferior good and demand is inelastic. A rise in income of 3% would lead to demand falling by 1.8%.