Income Elasticity of Demand
- AS, A-Level
- AQA, Edexcel, OCR, IB
Last updated 22 Mar 2021
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