The document discusses income elasticity of demand, which measures how much demand for a good changes with changes in consumer income. It defines income elasticity of demand using a formula and explains the differences between normal goods and inferior goods, as well as luxuries and necessities. The document also discusses positive and negative income elasticity and examples of goods that have income elasticity greater than, less than, or equal to one.

1. INCOMEELASTICITYOFDEMAND
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Introduction to economics (101)
Mam Salma Shaheen

2. Objective:
• Income elasticity of demand
• formula
• Normal goods and inferior goods
• Luxuries and necessities
• Positive income elasticity of demand ( ey > 0 )
• Negative income elasticity of demand ( ey< 0)
• Income elasticity greater than unity (ey>1).
• Income elasticity less than unity (ey<1).
• Income elasticity equal to unity (ey=1).
• Zero income elasticity (ey=0).

3. Income elasticity of demand
• Income elasticity of demand measures the degree to which
consumers respond to change in their income by buying more or
less of a particular good.
Ed = Percentage change in quantity demanded
Percentage change in income

4. con…
• The higher the income elasticity of demand in absolute terms for a particular
good, the bigger consumers' response in their purchasing habits—if their real
income changes.
• Businesses typically evaluate income elasticity of demand for their products to
help predict the impact of a business cycle on product sales.

7. Important points:
• The distinction between normal goods and inferior goods is not based on the
quality of the good
• A consumer who likes a good when his income is low may not like the same good
when his income is high
• The distinction between these two goods is based on the likings and disliking of a
consumer that develops with the change in income.
• No good is inferior at all times and for all

8. Luxuries and necessities
Luxuries – if income elasticity of demand of a commodity is greater than 1
Necessities – if income elasticity of demand of a commodity is less than 1
Examples:
off brand branded products
Necessity good Luxury good

9. 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
For example:
• As the income of consumer increases , they
consume more of superior goods.

10. Positive income elasticity of demand
• Positive Income Elasticity of Demand is associated with normal goods
• An increase in income will lead to a rise in demand.
• If income elasticity of demand of a commodity is less than 1, it is a necessity good.
• If the elasticity of demand is greater than 1, it is a luxury good or a superior good.

11. Income
( y )
Quantity
demanded
A Q
B Q1
C Q2

12. Negative income elasticity of demand
• If the quantity demanded for a commodity decreases with the rise in income of the
consumer and vice versa
• Inferior goods have a negative income elasticity of demand; as consumers' income rises,
they buy fewer inferior goods.
Example:
• A typical example of such type of product is margarine, which is much cheaper than butter.

13. INCOME QUANTITY
DEMANDED
20 2
10 4

14. Types
Following are some types of income elasticity of demand.
 Income elasticity greater than unity (ey>1).
 Income elasticity less than unity (ey<1).
 Income elasticity equal to unity (ey=1).
 Zero income elasticity (ey=0).

15. Income elasticity greater than unity (ey>1)
When the percentage rise in income increases less than the increase in demand for
the commodity then the income elasticity of demand is greater than unity. If ey >1
it means that the good is superior or luxury good.
Example:
If the income increases by 40% and demand increases by 80% the income
elasticity of demand would be more than one.

16. Income elasticity greater than unity
(ey>1)

17. Income elasticity less than unity (ey<1)
When the percentage rise in income increases more than the increase in demand
for the commodity then the income elasticity of demand is less than unity. If ey<1
it means that the good is an inferior good.
Example:
When the consumers income rises by 10% and the demand rises by 6%
then the income elasticity is less than unity.

18. Income elasticity less than unity (ey<1)

19. Income elasticity equal to unity (ey=1)
When the percentage rise in income is equal to the increase in demand for the
commodity then the income elasticity of demand is equal to unity. If ey=1 then
demand would also be known as unitary income.
Example:
If the income increases by 10% and demand increases by 10% then the
income elasticity of demand is equal to one.

20. Income elasticity equal to unity (ey=1)

21. Zero income elasticity(ey=0)
When rise/fall in income does not effect demand for the commodity and it remains
constant then the income elasticity of demand is equal to zero. If ey=0 it means
that the good is an essential good.
Example:
Increase or decrease in the price of essential good (e.g.; salt ,sugar) does
not effect its consuming demand.

22. Zero income elasticity(ey=0)