The income elasticity of demand is defined as
the rate of change in the quantity demanded
of a good due to changes in the income of
It is the responsiveness of demand to the
change in income
It is calculated as the percentage change in
demand to the percentage change in income
It measures the relationship between a
change in quantity demanded and a change
The basic formula for calculating the of
income elasticity is:
Percentage change in demand
Percentage change in income
If, in response to a 10% increase in income,
the demand for a good increased by 20%, the
income elasticity of demand would be
20%/10% = 2.
When a buyer in a certain income range
experiences an income increase, their
purchase of a product changes to match that
of individuals in their new income range.
If the proportion of income spent on the
goods remains the same as the income
increases ,then the income elasticity of
demand for the goods is equal to one.
If the proportion of income spent on goods
increases as income increases , then the
income elasticity of demand is more than
3) If the proportion of income spent on goods
decreases as income increases , then the
income elasticity for the goods is less than
4)If the change in income will have no effect on
the quantity demanded , then it is negative
Normal goods have a positive income
elasticity of demand so as income rise more
is demand at each price level.
Normal goods are of two:-Normal Necessities
and Normal Luxuries (both have a positive
coefficient of income elasticity).
Necessities have an income elasticity of
demand of between 0 and +1. Demand rises
with income. If the income elasticity is less
than one, it is called a necessity.
Luxuries on the other hand are said to have
an income elasticity of demand more than
+1. (Demand rises more than proportionate
to a change in income).
If the income elasticity of good is greater
than one, it is called luxury.
Inferior goods have a negative income
elasticity .Demand falls as income rises.
income elasticity :
If the demand for a commodity
decreases with an increases in income, the
demand is said to be negative income elastic.
The income elasticity co-efficient in this case
Eg: Jowar, Bajra etc
When the change in income do not
bring about any changes in quantity
demanded, that is quantity demanded
remains same, it is said to be zero income
elasticity. Income elasticity co-efficient is
Ed = 0
Eg : Salt, Matches
elasticity less than one
When the percentage change in quantity
demanded is less than percentage changes in
income , the income elasticity is said to be
less than one. Thus income elasticity coefficient is Ed <1
Eg : Food grains
elasticity equal to one
If the percentage change in quantity
demanded is equal to percentage change in
income, it said to be unitary income elastic.
Income elasticity co-efficient is Ed =1
Eg : Fruits , Vegetables.
elasticity greater than one
The percentage change in quantity
demanded is greater than the percentage
change in income, the income elasticity is
said to be greater than one. The income
elasticity co-efficient is Ed > 1
Eg : TV sets, Cars.
a : Ed <0
b : Ed =0
c : Ed < 1
d : Ed = 1
e : Ed > 1
Quantity of a commodity demanded
NATURE OF GOODS
TYPES OF ELASTICITY
POSITIVE,LESS THAN 1