Types of Elasticity of Demand > Income Elasticity

Income elasticity of demand shows how much the demand for a product changes when income changes, keeping other factors like price constant.​

• "Income elasticity of demand means the ratio of the percentage change in the quantity demanded to the percentage change in income." - Watson
• "The responsiveness of demand to change in income is termed as income elasticity of demand." - R.G. Lipsey

E_y = `"Proportionate change in Quantity Demanded"/"Proportionate change in income"`

\[E_y=\frac{\frac{\Delta Q}{Q}}{\frac{\Delta Y}{Y}}\quad=\frac{\Delta Q}{Q}\div\frac{\Delta Y}{Y}=\frac{\Delta Q}{Q}\times\frac{Y}{\Delta Y}\]

Where:

E_y = Income elasticity of demand
ΔQ = Change in the quantity demanded
Q = Initial demand
ΔY = Change in income
Y = Initial Income

Family’s income rises from ₹50,000 to ₹55,000 (10% increase);
Demand for rice increases from 200 kg to 220 kg (10% increase):

\[YED=\frac{(220-200)/200}{(55,000-50,000)/50,000}=\frac{0.1}{0.1}=1\]

This means unitary income elasticity.​

1. Forecasting Demand:
   Helps predict how the demand for different products will change as people’s incomes rise or fall. For example, as income increases, demand for luxury goods grows faster than for necessities.​
2. Business Planning:
   Businesses use income elasticity to decide what products to produce or promote. If a product has high income elasticity, companies focus more on it when incomes are rising, like cars or air conditioners.​
3. Economic Policy & Development:
   Governments use income elasticity to plan for economic shifts. In developed countries, demand for services (education, entertainment) usually has high income elasticity, while basic items such as food rise slowly as income increases.​
4. Classifying Goods:
   Income elasticity helps separate luxury goods (high elasticity), necessities (low elasticity), and inferior goods (negative elasticity), aiding pricing and marketing strategies.

• Luxury good: Students buy more fast food or upgrade phones when their pocket money increases (YED > 1).
• Necessity: Families may buy a little more rice or soap as income grows, but not double (0 < YED < 1).
• Essential: Salt stays constant regardless of income (YED = 0).
• Inferior: If income rises, people prefer restaurant food over cheap instant noodles (YED < 0).

• YED shows how demand changes with income.
• Luxury goods: YED > 1 → demand grows faster than income.
• Necessities: 0 < YED < 1 → demand grows slower than income.
• Essential goods: YED = 0 → demand stays the same.
• Inferior goods: YED < 0 → demand drops as income rises.