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.

Examples:

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%.

Unlock Premium Content

Upgrade your account to access the full article, downloads, and exercises.

You'll get access to:

Access complete tutorials and examples
Download source code and resources
Follow along with practical exercises
Get in-depth explanations

Income Elasticity of Demand

Unlock Premium Content

You'll get access to:

Price Elasticity of Demand

Cross Price Elasticity of Demand

Topics

Related Groups

Course Downloads

Demand and Supply Analysis