this measures the degree of responsiveness of demand to a change in income
Formula for income elasticity of demand
Ey = % change in QD / % change in income
Ey formula - long one is…
Qd2 -Qd1 / Y2 - Y1 x Y1 + Y2 / Qd1 + Qd2
What does Y stand for in the Ey fomula
Y = income
Coefficient meanings
Ey is less than 0 = inferior good
Ey is between 0 and 1 = necessity
Ey is greater than 1 = luxury
Inferior goods are..
Goods of low quality and so are typically purchased only by those earning low incomes.
As income rises - demand for inferior goods falls. eg (store-brand groceries, as income increases people switch to known brands for better quality although expensive)
Necessities and Luxuries
both are normal goods ( demand for these goods will rise as income rises)
