Income Elasticity of

Demand
• Income elasticity of demand is the degree of responsiveness
of quantity demanded of a commodity due to change in
consumer’s income, other things remaining constant.

• In other words, it measures by how much the quantity

demanded changes with respect to the change in income.
o EY = Elasticity of demand
o q = Original quantity demanded
o Δq = Change in quantity demanded
o y = Original consumer’s income
o Δy= Change in consumer’s income
• ΔQ = (New Quantity Demanded – Original Quantity Demanded)
• ΔY = (New Consumer’s Income – Original Consumer’s Income)
• Q = Original Quantity demanded
• Y = Original Consumer’s income
Suppose that the initial income of a person is Rs.2000 and quantity
demanded for the commodity by him is 20 units. When his income
increases to Rs.3000, quantity demanded by him also increases to 40 units.
Find out the income elasticity of demand.

Solution:
• q = 20 units
• Δq = (40-20) units = 20 units
• y = Rs.2000
• Δy =Rs. (3000-2000) =Rs.1000
Types of Income Elasticity of demand
1. Positive income elasticity of demand (E Y>0)
If there is direct relationship between income of the
consumer and demand for the commodity, then income
elasticity will be positive. That is, if the quantity demanded
for a commodity increases with the rise in income of the
consumer, it is said to be positive income elasticity of
demand.
For example: as the income of consumer increases, they
consume more of superior (luxurious) goods. On the contrary,
as the income of consumer decreases, they consume less of
luxurious goods.
2. Negative income elasticity of demand (EY<0)
If there is inverse relationship between income of the
consumer and demand for the commodity, then income
elasticity will be negative. That is, if the quantity demanded
for a commodity decreases with the rise in income of the
consumer, it is said to be negative income elasticity of
demand.
For example: As the income of consumer increases, they
either stop or consume less of inferior goods.
3. Zero income elasticity of demand (EY=0)
If the quantity demanded for a commodity remains
constant with any rise or fall in income of the
consumer and, it is said to be zero income elasticity of
demand. For example: In case of basic necessary
goods such as Salt, Kerosene, Medicine, Match Box,
etc. there is zero income elasticity of demand.
• In the case of Normal Goods, the coefficient of income elasticity is
unity (Ey = 1) when the demand for a commodity rises in the same
proportion as the increase in income. For example, a 10% increase in
income leads to 10% rise in demand, E y =5/5=1.
• If the value of income elasticity is greater than 1, demand is
said to be income elastic. This means that the change in
demand is proportionately greater than the change in
income.
• If the value of income elasticity of demand is less than
1,demand is said to be income inelastic. This means that the
change in demand is proportionately less than the change in
income.
o The value of income elasticity show whether goods are
normal goods, luxurious or inferior goods.
o For Normal Goods and essentials: Income elasticity lies
between 0 to 1
o For Luxurious Good: Income elasticity is greater than 1
o For Inferior Good: Income elasticity is negative (-).
Significance
• Product switching: Some manufacturers have flexible
resources and can switch from the production of one good
to another. For example, a manufacturer of plastic moulded
products may be able to switch from the production of
plastic household goods to plastic toys.

• A predicted rise in incomes may encourage such a business

to make more Kids Plastic Luxury Kitchen Set Cooking Toys if
demand for them was income elastic.