Income Elasticity of Demand

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