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• 10+ Yr. of Industry Experience # Income Elasticity of Demand

## What is the elasticity of demand?

Income elasticity of demand is a concept that shows how the demand for a certain good changes when the consumer’s income changes. It can be positive or negative, or sometimes not affected by income at all. The demand for a normal good increase when the consumer’s income increases and decreases when the consumer’s income decreases as long as other factors of demand stay the same. Income elasticity of demand is a measure of how much the demand changes when the consumer’s income changes. The higher the income elasticity of demand for a certain good, the more the demand changes when the consumer’s income changes.

## The elasticity of Demand Explained

Income elasticity measures how responsive demand for a good is to changes in income. A high-income elasticity means that demand for a good will increase a lot when income rises and decrease a lot when income falls. A low-income elasticity means that demand for a good will not change much when income changes.

Income elasticity is important for governments and firms to know what goods to produce and how income changes in the economy affect the demand for their products, i.e., whether it is inelastic or elastic.

Income elasticity can be positive or negative. This depends on the kind of good. A normal good has a positive income elasticity, while an inferior good has a negative income elasticity.

## Income Elasticity of Demand Formula

The formula for calculating the Income Elasticity of Demand (YED) is the ratio of the percentage change in quantity demanded to the percentage change in income. It can be expressed as:

Income Elasticity of Demand = [(New Quantity Demand - Old Quantity Demand) / Old Quantity Demand] / [(New Income - Old Income) / Old Income