Business, Legal & Accounting Glossary
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 per cent change in quantity demanded to the per cent 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.
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. If income elasticity of demand for a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good.
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.
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This glossary post was last updated: 24th April, 2020 | 4 Views.