Income Elasticity of Demand

Income Elasticity of Demand measures the responsiveness of quantity demanded for a product to a change in income.

income elasticity of demand
income elasticity of demand
  • YED= Income elasticity of demand
  • ∆Q= Change in quantity demanded
  • Q1= Original quantity demanded
  • Q2= New quantity demanded
  • ∆Y= Change in income
  • Y1= Original level of income
  • Y2= New level of income
  • For normal products, numerical measure of income elasticity of demand is usually positive because the demand for most goods increases as people’s incomes increases and falls with a reduction in income.
  • There is an outward shift in the demand curve.

YED – Necessities and Luxury goods

  • Necessities Income elasticity is less than 1 and more than 0. As income increases, proportionally less is spent on necessities. For example, Giffen goods, bread, milk or own label branded products.
  • For normal necessity products(income elastic), YED is positive and the coefficient is<+1. These products have a low but positive YED. For example, a 10% rise in income may cause the demand for bread products to rise by 3%. YED = +0.3. The percentage change in demand is rising less proportionately to a change in income.
  • Luxuries Income elasticity is more than 1, proportionally more of it is spent on luxury items. Examples include holidays, consumer goods, motor cars, dishwashers.
  • Normal products (luxury), YED is positive and coefficient is >+1. For example, Apple I phone is a normal good so it has a positive YED. It is a luxury so it is income elastic.(>1)
  • For example, a 10% increase in income may lead to lead a rise of 15% in demand for holidays. YED = +1.5. The demand rises more proportionately to a change in income in this case.
  • There are goods less of which are bought as income rises, i.e., income elasticity of demand is negative. These are known as inferior goods. Consumer switch to better alternatives or substitute products that consumers can afford. For inferior products, YED is negative.

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