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Study notes

Income Elasticity of Demand

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB

Income elasticity of demand measures the extent to which the quantity of a product demanded is affected by a change in income.

The formula for calculating IED is shown below

For most normal products

  • A rise in consumer income will result in a rise in demand
  • A fall in consumer income will result in a fall in demand

Extent of the change (elasticity)

  • This will vary depending on the type of product (e.g. luxury v necessity)

Looking further at this distinction between luxuries and necessities:

Watch out too for inferior goods. These have an income elasticity of less than one.

For inferior goods, as income rises demand actually falls. Why does demand fall?

  • Consumers switch to better alternatives
  • Substitute products become affordable

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