NationMaster - Encyclopedia: Income elasticity of demand

In economics, the income elasticity of demand measures the responsiveness of the quantity demanded of a good to the income of the people demanding the good.

Formula: (%change in demand) / (%change in income) = Income elasticity

It is measured as the percentage change in demand that occurs in response to a percentage change in income. For example, if, in response to a 10% increase in income, the quantity of a good demanded increased by 20%, the income elasticity of demand would be 20%/10% = 2.

More formally, for a given Marshallian demand function $Q(I,vec{P})$ for a good is In microeconomics, a consumers Marshallian demand function specifies what the consumer would buy in each price and wealth situation, assuming it perfectly solves the Utility Maximization Problem. ...

With income $I$ , and vector of prices $vec{P}$ .

A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the quantity demanded and may lead to changes to more luxurious substitutes. In consumer theory, an inferior good is a good that decreases in demand when the consumers income rises, unlike normal goods, for which the opposite is observed. ...

A positive income elasticity of demand is associated with normal goods; an increase in income will lead to a rise in the quantity demanded. A high positive income elasticity of demand is associated with luxury goods.

A zero income elasticity of demand is an increase in income without leading to a change in the quantity demanded of a good.

Many necessities have an income elasticity of demand between zero and one: expenditure on these goods may increase with income, but not as fast as income does, so the proportion of expenditure on these goods falls as income rises. This observation for food is known as Engel's law. In criminal law, necessity is a possible excuse for breaking the law. ... Engels law is an observation in economics stating that, with a given set of tastes and preferences, as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises. ...

Category: Consumer theory

Results from FactBites:

Tutor2u - Income Elasticity of Demand (958 words)
	Income elasticity of demand measures the relationship between a change in quantity demanded and a change in income.
	For example if we find that the income elasticity of demand for cigarettes is -0.3, then a 5% fall in the average real incomes of consumers might lead to a 1.5% fall in the total demand for cigarettes (ceteris paribus).
	Consider the income elasticity of demand for flat-screen colour televisions as the market for plasma screens develops and the income elasticity of demand for TV services provided through satellite dishes set against the growing availability and falling cost (in nominal and real terms) and integrated digital televisions.

OECD Glossary of Statistical Terms - Income elasticity of demand (281 words)
	The Income elasticity of demand is the quantity demanded of a particular product depends not only on its own price (see elasticity of demand) and on the price of other related products (see cross price elasticity of demand), but also on other factors such as income.
	The measures of income elasticity of demand may be either positive or negative numbers and these have been used to classify products into "normal" or "inferior goods" or into "necessities" or "luxuries".
	Margarine has in past studies been found to have a negative income elasticity of demand indicating that as family income increases, its consumption decreases possibly due to substitution of butter.

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