Income and Cross Elasticity of Demand

Income elasticity of demand

Income elasticity of demand is a measure of the responsiveness of demand to a change in income. It can be calculated by using the following formula:

% change in quantity demanded

% change in income

• If the good is normal (i.e. demand for it increases when real income increases and vice versa) the value of the elasticity will be positive.
• If the good is inferior (i.e. demand decreases when real income increases and vice versa) income elasticity of demand will be negative.

 The factors affecting income elasticity of demand are the same as those for price elasticity of demand: 

• Whether the good is normal or inferior - if income elasticity of demand is positive the good is ‘normal’ but if it is negative…