This document discusses income elasticity of demand, which measures how much demand for a good changes with changes in consumer income. There are three types of income elasticity: positive, negative, and zero. Positive income elasticity means demand increases with income and there are three sub-types: less than one, equal to one, and greater than one. Negative income elasticity means demand decreases with increasing income, as seen with inferior goods. Zero income elasticity means demand does not change with income, as with necessities like salt. The document provides examples and graphs to illustrate each type of income elasticity.

1. DEMAND FUNCTIONS
Dr. NGPASC
COIMBATORE | INDIA
Dr. N.G.P. ARTS AND SCIENCE COLLEGE
(An Autonomous Institution, Affiliated to Bharathiar University, Coimbatore)
Approved by Government of Tamil Nadu and Accredited by NAAC with 'A' Grade (2nd Cycle)
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Web: www.drngpasc.ac.in | Email: info@drngpasc.ac.in | Phone: +91-422-2369100
RAJAKRISHNAN M
Assistant Professor in Commerce CA

2. Dr. NGPASC
COIMBATORE | INDIA
Income Elasticity of Demand
Definition:
Other things remaining the same, it is degree of responsiveness of quantity demanded of a commodity due to change
in consumer’s income.
Income elasticity of demand measures by how much the quantity demanded changes with respect to the change in
income.

3. Dr. NGPASC
COIMBATORE | INDIA
Income Elasticity of Demand
Positive Income elasticity of demand
Negative Income elasticity of demand
Zero Income elasticity of demand

4. Dr. NGPASC
COIMBATORE | INDIA
Income Elasticity of Demand

5. Dr. NGPASC
COIMBATORE | INDIA
Positive Income Elasticity of Demand
If the quantity demanded for a commodity increases with the rise in income of the
consumer and vice versa, it is said to be positive income elasticity of demand.
When a proportionate change in the income of a consumer increases the demand for a
product and vice versa, income elasticity of demand is said to be positive. In case of
normal goods, the income elasticity of demand is generally found positive

6. Dr. NGPASC
COIMBATORE | INDIA
Positive Income Elasticity of Demand
• Income Elasticity Less
Than Unity or One
• Income Elasticity Greater
Than Unity Or One
• Income Elasticity Equal to
Unity or One

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COIMBATORE | INDIA
Positive Income Elasticity of Demand
DYDY is the curve representing positive income elasticity of demand. The curve is sloping upwards from
left to the right, which shows an increase in demand (OQ to OQ1) as a result of rise in income (OB to OA)

8. Dr. NGPASC
COIMBATORE | INDIA
Types of Positive Income Elasticity of Demand
Unitary income elasticity of demand: The income elasticity of demand is said to be unitary
when a proportionate change in a (increase) for a product. For example, if there is 25% increase
in the income of a consumer, the demand for milk consumption would also be increased by 25%.
Thus ey = 25/25 =1.
Less than unitary income elasticity of demand: The income elasticity of demand is said to be
less than unitary when a proportionate change in a consumer’s income causes comparatively
less increase in the demand for a product. For example, if there is an increase of 25% in
consumer’s income, the demand for milk is increased by only 10%. Thus ey = 10/100 = 0.1 < 1.
More than unitary income elasticity of demand: The income elasticity of demand is said to be
more than unitary when a proportionate change in a consumer’s income causes a comparatively
large increase in the demand for a product. For example, if there is an increase of 25% in
consumer’s income, the demand for milk is increased by only 35%. Thus ey = 35/25 = 1.4 > 1.

9. Dr. NGPASC
COIMBATORE | INDIA
Negative Income Elasticity of Demand
When a proportionate change in the income of consumer results in a fall
in the demand for a product and vice versa, the income elasticity of
demand is said to be positive. It generally happens in the case of inferior
goods.
For example, consumers may prefer small cars with a limited income.
However, with a rise in income, they may prefer using luxury cars.

10. Dr. NGPASC
COIMBATORE | INDIA
Negative Income Elasticity of Demand
DYDY is the curve
representing negative
income elasticity of
demand. The curve is
sloping downwards from
left to the right, which
shows a decrease in the
demand as a result of a
rise in income.
With a rise in
income from
10 to 30, the
demand falls
from 3 to 2.

11. Dr. NGPASC
COIMBATORE | INDIA
Zero Income Elasticity of Demand
When a proportionate change in the income of a consumer does not bring any change in the product,
income elasticity of demand is said to be zero. It generally occurs for utility goods such as salt,
kerosene, electricity.
DYDY is the curve representing zero income
elasticity of demand. The curve is parallel to Y-
axis that shows no change in the demand as a
result of a rise in income.
With a rise of income from 10 to 20, the
demand remains the same i.e. 4.

12. Dr. NGPASC
COIMBATORE | INDIA
Factors affecting Income Elasticity of Demand
Income of consumers in a country
A consumer with a low income may prefer using public transport for commuting. However,
with a rise in income, he/she may buy a two-wheeler for the same purpose.
Nature of products
Basic goods used on a day to day basis, such as salt, sugar, and cooking oil, is elastic. Even
with a rise in the income of a consumer, the demand for such products does not change and
remain inelastic.
Consumption pattern
A consumer may buy a two-wheeler that runs on petrol as a result of a rise in his/her income.
However, over a period of time, in case his/her income falls, it will be difficult for him to
reduce the consumption of petrol.

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