The income elasticity of demand measures the responsiveness of the
demand for a good or service to a change in income.
LEARNING OBJECTIVE [ edit ]
Analyze the characteristics of the income elasticity of demand.
KEY POINTS [ edit ]
The income elasticity of demand is the ratio of the percentage change in demand to the
percentage change in income.
Normal goods have a positive income elasticity of demand (as income increases, the quantity
demanded increases).
Inferior goods have a negative income elasticity of demand (as income decreases, the quantity
demanded decreases).
TERMS [ edit ]
Necessary Good
A type of normal good. An increase in income leads to a smaller than proportional increase in the
quantity demanded.
Superior Good
A type of normal good. Demand increases more than proportionally as income rises.
Give us feedback on this content: FULL TEXT [edit ]
The income elasticity of demand (YED) measures the responsiveness of demand for a good to
a change in the income of the people demanding that good, ceteris paribus. It is calculated as
the ratio of the percentage change in demand to the percentage change in income:
Y ED =
%
change
%
change
in
quantity
in
real
demanded
income
If an increase in income leads to an
increase in demand, the income elasticity
of that good or service is positive. A
positive income elasticity is associated
with normal goods. In contrast, if a rise in
income leads to a decrease in demand, the
good or service has a negative income
elasticity of demand. A negative income
elasticity is associated with inferior goods.
Register for FREE to stop seeing ads
In all, there are five types of income
elasticity of demand :
Income Elasticity of Demand
Income elasticity of demand measures the percentage change in quantity demanded as income changes.
High income elasticity of demand (YED>1): An increase in income is accompanied by a
proportionally larger increase in quantity demanded. This is typical of
a luxury or superior good.
Unitary income elasticity of demand (YED=1): An increase in income is accompanied by a
proportional increase in quantity demanded.
Low income elasticity of demand (YED<1): An increase in income is accompanied by less
than a proportional increase in quantity demanded. This is characteristic of a necessary
good.
Zero income elasticity of demand (YED=0): A change in income has no effect on the
quantity bought. These are called sticky goods. Negative income elasticity of demand (YED<0): An increase in income is accompanied by
a decrease in the quantity demanded. This is an inferior good (all other goods are normal
goods). The consumer may be selecting more luxurious substitutes as a result of the
increase in income.