Income Elasticity of Demand

• Income Elasticity of Demand measures the extent to which the quantity of a product demanded is affected by a change in income
• Income Elasticity of Demand

  % change in demand / % change in income
• Products can be split into two categories: luxuries and Necessities
• Luxuries have and income elasticity of more than 1
• Income Elasticity >1 (Luxuries) means that as income grows, more money is spent on luxuries.
• Examples of luxuries: Branded goods and Expensive holidays
• Necessities have an income elasticity of less than 1, but more than 0
• Income Elasticity <1 (Necessities) means that as income grows less is spent on necessities
• For most normal products a rise in consumer income results in a rise in demand and a fall in consumer income will result in a fall in demand
• Inferior goods are where as income rises demand falls
• Inferior goods: IED is <0