Income Elasticity of Demand
This concept is used to describe how the quantity demanded responds to a change in income.
Varian, Hal R. Intermediate Microeconomics, Seventh Edition. W. W. Norton & Company, 2005. p. 281.
“It is an important piece of information to a firm as it helps them to predict how much the demand for their product will grow as the economy grows. We calculate the income elasticity from the following formula: Income elasticity of demand = % change in demand / % change in the level of income If the figure is greater than one then the product is described as 'income-elastic' or income-sensitive. This means that demand will grow by more than the level of income. If the figure is less than one, then the product is described as 'income-inelastic' and the demand will grow less than the level of income.
The sign of the income elasticity gives important information. If the income elasticity of demand is positive then the good is either normal or luxury. However, a negative income elasticity of demand implies that the good is inferior.”
From Biz/ed’s Glossary and Diagram Bank: