Income Elasticity of Demand

Income Elasticity of Demand

Income elasticity of demand measures the responsiveness of quantity demanded of a commodity (or service) to the change in the average consumer’s income. It is expressed as the ratio of the percentage change in quantity demanded to the percentage change in consumer’s income.

\(E_y = \cfrac{\text{percentage change in quantity demanded}}{\text{percentage change in income}}\)

Types of Income Elasticity of Demand

There are five (5) types or degrees of income elasticity of demand.

a) Elastic Demand:

This occurs in the case where the quantity demanded changes by a greater percentage than the percentage change in consumer’s income. In this case, the income elasticity of demand coefficient \((E_y)\) is positive and greater than 1. The commodity is described as a normal good (superior good).

b) Inelastic Demand:

This occurs in the case where the quantity demanded changes by a smaller percentage than that of income. The income elasticity of demand coefficient \((E_y)\) is positive but less than 1. The commodity is also described as a normal good.

c) Negative Demand:

This occurs in the case where quantity demanded falls as consumer’s income increases. The income elasticity of demand coefficient \((E_y)\) is less than 0 (negative). The commodity is described as an inferior good.

d) Unit Demand:

This is when a percentage increase or decrease in income causes an equal percentage increase or decrease in quantity demanded. The income elasticity of demand coefficient \((E_y)\) is equal to 1. This commodity is described as a normal good.

e) Perfectly Inelastic Demand:

This occurs when any change in income leaves the quantity demanded of a commodity unchanged. The income elasticity of demand coefficient \((E_y)\) is equal to 0. The commodity is described as a necessity good.