Income Elasticity Of Demand

AAA

DEFINITION of 'Income Elasticity Of Demand'

A measure of the relationship between a change in the quantity demanded for a particular good and a change in real income. Income elasticity of demand is an economics term that refers to the sensitivity of the quantity demanded for a certain product in response to a change in consumer incomes. The formula for calculating income elasticity of demand is:


Income Elasticity of Demand = % change in quantity demanded / % change in income


For example, if the quantity demanded for a good increases for 15% in response to a 10%increase in income, the income elasticity of demand would be 15% / 10% = 1.5. The degree to which the quantity demanded for a good changes in response to a change in income depends on whether the good is a necessity or a luxury.

INVESTOPEDIA EXPLAINS 'Income Elasticity Of Demand'

Normal goods have a positive income elasticity of demand. As incomes rise, more goods are demanded at each price level. The quantity demanded for normal necessities will increase with income, but at a slower rate than luxury goods. This is because consumers, rather than buying more of the necessities, will likely use their increased income to purchase more luxury goods and services. During a period of increasing incomes, the quantity demanded for luxury products tends to increase at a higher rate than the quantity demanded for necessities. The quantity demanded for luxury goods is very sensitive to changes in income.


Inferior goods have a negative income elasticity of demand - the quantity demanded for inferior goods falls as incomes rise. For example, the quantity demanded for generic food items tends to decrease during periods of increased incomes.


Businesses evaluate income elasticity of demand for various products to help predict the impact of a business cycle of product sales.

RELATED TERMS
  1. Inelastic

    An economic term used to describe the situation in which the ...
  2. Demand Elasticity

    In economics, the demand elasticity refers to how sensitive the ...
  3. Elasticity

    A measure of a variable's sensitivity to a change in another ...
  4. Demand

    An economic principle that describes a consumer's desire and ...
  5. Supply

    A fundamental economic concept that describes the total amount ...
  6. Price Elasticity Of Demand

    A measure of the relationship between a change in the quantity ...
Related Articles
  1. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  2. Retirement

    Economic Indicators To Know

    The economy has a large impact on the market. Learn how to interpret the most important reports.
  3. Economics

    Where is cost of living lowest in the world?

    Learn how the cost of living is the lowest in India based on numbers derived from the CPI and organizations like Expatistan and Numbeo.
  4. Investing

    Opportunity Cost

    Every action has a cost, even the ones you don't pursue. Find out how this is calculated.
  5. Fundamental Analysis

    How Influential Economists Changed Our History

    Find out how these five groundbreaking thinkers laid our financial foundations.
  6. Economics

    How Fannie Mae And Freddie Mac Were Saved

    These mortgage giants had to be put under government conservatorship, driving home the gravity of the subprime crisis.
  7. Economics

    The Economics Of Labor Mobility

    Loosening labor restrictions has both good and bad effects for a country and its workers.
  8. Investing

    What is the Mont Pelerin Society?

    The Mont Pelerin Society was formed in 1947 when economist Friedrich von Hayek invited 39 people to meet at Mont Pelerin in Switzerland. Mostly made up of economists, the group was brought together ...
  9. Economics

    What Is Opportunity Cost And Why Does It Matter?

    Economists suggest that the "opportunity cost" of any decision, the value of the next-best alternative, is crucial to making sound choices.
  10. Active Trading

    Competitive Advantage Counts

    What's the best indicator of a company's future success? Its ability to succeed when others fail.

You May Also Like

Hot Definitions
  1. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  2. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  3. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  4. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  5. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  6. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
Trading Center