INCOME ELASTICITY OF DEMAND

In economics, the 'income elasticity of demand' measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. It is calculated as the ratio of the percent change in quantity demanded to the percent change in income. For example, if, in response to a 10% increase in income, the quantity of a good demanded increased by 20%, the income elasticity of demand would be 20%/10% = 2.

Contents

Interpretation

Mathematical definition

See also

Interpretation

'A negative' income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the quantity demanded and may lead to changes to more luxurious substitutes.
'A positive' income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in the quantity demanded. A high positive income elasticity of demand is associated with luxury goods.
'A zero' income elasticity (or inelastic) demand occurs when an increase in income is not associated with a change in the quantity demanded of a good.

Mathematical definition

More formally, the income elasticity of demand for a given Marshallian demand function for a good is
:
or alternatively:

:$E\_d=\{Y\_1\; +\; Y\_2\; over\; Q\_1\; +\; Q\_2\}\; imes\{Delta\; Q\; over\; Delta\; Y\}$

With income $I$, and vector of prices .
Many necessities have an income elasticity of demand between zero and one: expenditure on these goods may increase with income, but not as fast as income does, so the proportion of expenditure on these goods falls as income rises. This observation for food is known as ''Engel's law''.

See also

★ Price elasticity of demand

★ Price elasticity of supply