income elasticity of demand

• income elasticity of demand measures how changes in consumer income affect the quantity demanded for goods, while keeping the prices of the goods constant.
• As consumer income rises, the quantity demanded of goods generally increases. This causes a rightward shift in the demand curve.
• The amount spent on different goods changes as incomes rise. This is captured by the budget share of each good:
• Budget share = Price × Quantity demanded / Total consumer spending
• Income elasticity of demand measures how much the quantity demanded changes in response to changes in income:
• • Income elasticity = Percentage change in quantity demanded ÷ Percentage change in income.
• Normal goods: As income rises, demand increases. They have positive income elasticity.
• Inferior goods: As income rises, demand decreases. They have negative income elasticity.
• Luxury goods: Goods for which income elasticity is greater than 1. These are high-quality goods that people buy more of as their income increases.
• Necessities: Goods with income elasticity between 0 and 1. These are essential goods like food, where demand rises slowly as income increases
• Key Insight: Within food categories, higher incomes lead to shifts towards higher-quality or more expensive products (e.g., fresh vegetables over canned).
• Using Income Elasticities:

  • Forecasting demand: Income elasticities allow economists and businesses to predict how demand will shift as incomes rise
• • Income elasticity of demand measures how sensitive demand is to changes in income.
  • Normal goods have positive income elasticity, while inferior goods have negative elasticity.
  • Luxury goods have elasticity greater than 1, while necessities have elasticity between 0 and 1.
  • Rising incomes lead to shifts in consumption patterns, often toward higher-quality or more expensive goods.
• YED measures the responsiveness of quantity demanded given a change in income
• YED: positive for normal goods
• YED : negative for inferior goods
• YED = % change in quantity demanded / % change in income
• Y = income
• If YED > 1 demand is income elastic meaning its a normal luxury good
• If YED < 1 demand is income inelastic meaning that it is a normal necessity
• if YED > 1 for inferior goods demand is income elastic
• if YED < 1 for inferior goods, demand is income inelastic
• 0 : demand is perfectly income inelastic