income elasticity of demand basically measures the relationship between change in quantity demanded for particular good and a change in real income.

3. Income Elasticity of Demand
refers to the responsiveness of
the quantity demanded for a
good or service to a change in
the income of the people
demanding the good , ceteris
paribus.

5. Mathematically, Income Elasticity of Demand expressed as:
ey = % change in quantity demanded of a product
% change in income of consumer
% change in Qx = Q2 –Q1 % change in Y = Y2 – Y1
( Q2+Q1)/2 (Y2 + Y1)/2
Here,
QX = Quantity demanded of product ‘X’
Q1 = Initial Quantity demanded
Q2 = New Quantity demanded
Y = Income of consumer
Y1 = Initial Income of consumer
Y2 = New Income of consumer

6. Putting the equations together :
ey = Q2 – Q1 Y2 – Y1
(Q2 +Q1)/2 (Y2 + Y1)/2

7. Suppose, the monthly
income of an individual
increases from Rs. 6,000
(Y1) to Rs. 12,000 (Y2).
Now, his/her demand for
clothes increases from 30
units (Q1) to 60 units
(Q2).
QX ( UNITS) Y(RUPEES)
30 6,000
60 12,000

9. Income elasticity of demand is classified into three groups, which
are as follows :
1) Positive Income Elasticity of Demand
a) Unitary Income Elasticity of Demand
b) More than Unitary Income Elasticity of Demand
c) Less than Unitary Income Elasticity of Demand
2) Zero Income Elasticity of Demand
3) Negative Income Elasticity of Demand

10. POSITIVE INCOME ELASTICITY OF DEMAND
 It refers to a situation when the demand for the product increases
with increase in the income of the consumer and vice versa.
 The income elasticity of demand is positive for normal or luxurious
goods.
It is classified into three categories, namely :
a) Unitary Income Elasticity of Demand
b) More than Unitary Income Elasticity of Demand
c) Less than Unitary Income Elasticity of Demand

11. (1) UNITARY INCOME ELASTICITY OF DEMAND
 Percentage change in quantity demanded of a commodity is
equal to the percentage change in the income of the consumer.
 It is represented as ey = 1
 Example, income increases by 50%
and demand also increases by 50%.
 The demand curve take the shape
of 45 degree.

12. (2) MORE THAN UNITARY I. E. D.
 Percentage change in quantity demanded of a commodity is
greater than the percentage change in income of the
consumer.
 It is represented as ey > 1
 Example, income increases by 50%
and demand rises by 100%.
 The demand curve in this case is
flatter.

13. (3) LESS THAN UNITARY I. E. D.
 Percentage change in quantity demanded of a commodity is
less than the percentage change in income of the consumer.
 It is represented as ey < 1
 Example, income increases by 50%
and demand rises only by 25%.
 The demand curve for this case is
steeper.

14. ZERO INCOME ELASTICITY OF DEMAND
 Percentage of quantity demanded for a commodity remains
constant with the percentage change in income of the consumer.
 It is represented as ey = 0
 The income elasticity of demand is
zero in case of essential goods.
 Example, income increases by 50%
and the demand remains constant.
 The demand curve in this case is a
vertical straight line.

15. NEGATIVE INCOME ELASTICITY OF DEMAND
 The quantity demanded for a commodity decreases with rise in
income of the consumer.
 It is represented as ey < 0
 The income elasticity of demand is
negative for inferior or giffen goods.
 Example, income increases by 50% and
demand decreases by 25%.
 The demand curve in this case has
downward slope from left to right.

18. Income Elasticity of Demand is significant as it
affects :
 Nation’s economy
 Manufacturer / firm
# sales forecasting
# pricing policy
# diversification
 Business cycle