# Income elasticity of demand

It is the degree of responsiveness of the quantity demanded of a good to a small change in the income of the consumers.

Symbolically, it can be represented as:

# Elasticity greater than one (Ei > 1):

If income levels increases, and the demand for goods increase by more than proportionate extent, such goods will be luxury goods. The income elasticity is greater than unity. v

# Elasticity equal to one (Ei = 1):

If the proportion of income spent on goods remains the same as income increases, then the income elasticity is equal to one.

# Elasticity lesser than one (>0 Ei < 1):

If income levels increases, and the demand for goods increase by less than proportionate extent, such goods will be necessary goods. The income elasticity is lesser than unity.

# Elasticity lesser than zero (Ei < 0):

If demand decreases with an increase in money income of consumers, such goods are called inferior goods. The income elasticity is lesser than zero.

In other words,
• In case of inferior goods, income elasticity is < 0
• In case of necessary goods, income elasticity is > 0 but < 1
• In case of luxury goods, income elasticity is > 1
Example

If the income of a household increases by 10%, the demand for TV rises by 20%. Thus the income elasticity of demand is:

Income elasticity (Ei) = Percentage change in quantity demanded / Percentage change in income

= 20% รท 10% = 2. Thus, the price elasticity is greater than 1. It is a luxurious commodity.