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%.