Income Elasticity of Demand
Understanding How Income Changes Affect Consumer Demand
What is Income Elasticity of Demand?
Income elasticity of demand (YED) measures the responsiveness of demand for a good or service to a change in consumer income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.
YED = (% Change in Quantity Demanded) / (% Change in Income)
YED = [(Q₂ - Q₁)/Q₁] / [(Y₂ - Y₁)/Y₁]
Types of Income Elasticity
Normal Goods (YED > 0)
Demand increases with income
- Luxury vehicles
- Premium electronics
- Fine dining
Inferior Goods (YED < 0)
Demand decreases with income
- Generic brands
- Public transportation
- Instant noodles
Luxury Goods (YED > 1)
Demand increases more than proportionally with income
- Designer clothing
- Vacation homes
- Private jets