Introduction

After you have worked through this section of the learning unit, you should be able to:

  • describe income elasticity and the measurement of income elasticity
  • distinguish between the income elasticity of normal goods and inferior goods
  • distinguish between the income elasticity of luxury goods and necessities

What we are interested in is how responsive the quantity demanded of a product is to a change in the consumers' income – in other words, what is the income elasticity of demand.

In the case of a normal good, an increase in income increases the demand for it. Income elasticity tells us something about the size of the increase.

The income elasticity of demand is the responsiveness of quantity demanded of a product to a change in the consumers' income and is calculated as the percentage change in quantity demanded divided by the percentage change in income.

$$\text{Income elasticity of demand }e_y = {\text{% change in quantity demanded} \over \text{% change in income}}$$